india daily, january 9, 2015 - kotak securities · dewan housing finance (dhfl) is india’s...

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

Contents

Special Reports

Initiating Coverage

Dewan Housing Finance: More from less

Theme Report

Real Estate: Housing for all by 2022 - big opportunity in small housing

Daily Alerts

Company alerts

Reliance Industries: Inexpensive valuations versus telecom overhang

Sector alerts

Cement: 3QFY15 preview - the winter chill

INDIA DAILY January 9, 2015 India 8-Jan 1-day 1-mo 3-mo

Sensex 27,275 1.4 (1.9) 2.4

Nifty 8,235 1.6 (1.3) 3.4

Global/Regional indices

Dow Jones 17,908 1.8 0.6 7.5

Nasdaq Composite 4,736 1.8 (0.6) 8.2

FTSE 6,570 2.3 0.6 2.1

Nikkei 17,240 0.4 (3.2) 11.4

Hang Seng 23,999 0.7 2.2 2.0

KOSPI 1,921 0.8 (2.6) (2.3)

Value traded – India

Cash (NSE+BSE) 208 50 17

Derivatives (NSE) 1,686 2,064 1,635

Deri. open interest 1,988 2,144 1,907

Forex/money market

Change, basis points

8-Jan 1-day 1-mo 3-mo

Rs/US$ 62.5 (1) 41 138

10yr govt bond, % 8.0 (4) (7) (66)

Net investment (US$ mn)

7-Jan MTD CYTD

FIIs (171) (13) 16,162

MFs 1 (404) 4,802

Top movers

Change, %

Best performers 8-Jan 1-day 1-mo 3-mo

LICHF IN Equity 469.2 2.6 8.3 47.6

AL IN Equity 61.3 2.7 22.4 35.1

YES IN Equity 769.2 1.6 7.3 33.0

KMB IN Equity 1340.7 5.4 8.8 31.0

KKC IN Equity 893.2 (0.8) (2.2) 30.7

Worst performers

RCOM IN Equity 78.7 0.3 (17.9) (25.0)

SSLT IN Equity 210.5 0.7 (4.6) (19.6)

CAIR IN Equity 241.6 5.0 (4.9) (19.1)

GMRI IN Equity 17.1 0.9 (11.2) (18.8)

HDIL IN Equity 69.0 3.1 (8.2) (17.2)

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

The long haul: Reach and attractive mortgage rates to drive growth

Dewan Housing Finance (DHFL) is India’s third-largest housing finance company (4% market

share in housing loans) with a loan book of `494 bn, as of September 2014. We expect the

company to deliver 22% loan-book CAGR during FY2014-17E on the back of aggressive branch

expansion and lower lending rates in mortgages that will drive market share gains. We expect

the company to benefit from (1) recent tie-ups with developers in tier-I and tier-II cities that

drive higher yields and lift retail business and (2) lower borrowing costs post the recent rating

upgrade.

Attractive valuations; expect a rerating

At 7X PER and 1.1X PBR FY2016E, DHFL trades at a significant discount to peers. We attribute

this to (1) lower profitability, (2) constraints on capital, (3) investor concerns about multiple

acquisitions and the promoter group. We expect a rerating of the stock given (1) high growth

visibility and (2) steps taken by the management to address investor concerns (eliminating cross-

holdings with HDIL, induction of group management committee).

Stable RoE of 17%, NPLs negligible though constraints on capital are likely

We expect DHFL to deliver 18% EPS CAGR, 1.2-1.3% RoA and 17% RoE over FY2015-17E.

Stable interest spreads (i.e. lower lending rates supported by reducing borrowing costs), stable

operating expenses ratio and negligible NPLs are key drivers. Expansion initiatives can drive

higher growth but high leverage (average asset-to-equity ratio of 14X by FY2017E) is expected

to be a constraint. Unlocking value in the insurance JV can boost tier-I.

Key risks—heavy dependence on capital markets, risk of downgrade, developer NPLs

(1) DHFL is heavily dependent on debt and equity markets against a backdrop of high growth

and moderate RoE, (2) any rating downgrade poses a risk to profitability and to the business

model, especially given its low NIM, (3) fast growth in the developer loan book can lead to

higher NPLs and (4) diversification into multiple business lines cramps management bandwidth.

Dewan Housing Finance (DEWH) Banks/Financial Institutions

More from less. Our forecast of 22% loan-book CAGR in FY2014-17E for DHFL puts

the book at `814 bn by FY2017E. Our estimates are propelled by improving execution

and significant untapped mortgage demand. DHFL’s stable business model and 17%

medium-term RoE with negligible NPL risk make it an attractive long-term bid. We

expect a rerating on the back of the management’s efforts to address investor

concerns. We initiate coverage with a BUY rating and a target price of `540.

BUY

JANUARY 09, 2015

INITIATING COVERAGE

Coverage view: Attractive

Price (`): 421

Target price (`): 540

BSE-30: 27,275

QUICK NUMBERS

Life insurance

business adds `36-

50/share

Organic expansion,

lower lending rates

are key drivers

Focus on

productivity at

DHFL

Dewan Housing Finance

Stock data Forecasts/Valuations 2015 2016E 2017E

52-week range (Rs) (high,low) EPS (Rs) 50.5 58.6 67.9

Market Cap. (Rs bn) EPS growth (%) 21.9 15.9 15.9

Shareholding pattern (%) P/E (X) 8.3 7.2 6.2

Promoters 39.2 NII (Rs bn) 13.3 15.2 17.7

FIIs 24.0 Net profits (Rs bn) 6.0 7.0 8.1

MFs 0.1 BVPS 301.9 348.3 402.1

Price performance (%) 1M 3M 12M P/B (X) 1.4 1.2 1.0

Absolute 6.3 31.5 103.1 ROE (%) 16.8 16.9 16.9

Rel. to BSE-30 9.6 26.6 54.3 Div. Yield (%) 1.3 1.6 1.8

Company data and valuation summary

442-198

54.1

Dewan Housing Finance Banks/Financial Institutions

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

VALUATIONS ATTRACTIVE, WE INITIATE COVERAGE WITH A BUY RATING

We initiate coverage on Dewan Housing Finance (DHFL) with a BUY rating and target price of `540. We

expect DHFL to deliver 22% loan-book CAGR during FY2014-17E, driving 18% EPS CAGR and 17% medium-

term RoE. DHFL trades at 1.1X PBR FY2016E, a significant discount to peers, probably due to its moderate

profitability, constraints on capital, investor concerns about multiple acquisitions (in housing finance and

other segments) and the promoter group. We believe high growth visibility and steps taken by the

management to address investor concerns will drive a rerating of the stock.

DHFL—poised for high growth, moderate profitability

We expect DHFL to deliver 17% medium-term RoE and 18% EPS CAGR over FY2014-17E

due to 22% loan-book CAGR. DHFL is well-placed to deliver high loan growth given

(1) strong latent demand, (2) a rapidly expanding footprint and (3) declining borrowing

costs, which improve its competitive positioning. However, DHFL faces constraints on capital

given its high leverage (average asset-to-equity ratio of 11.7X in FY2014). DHFL will need

periodic capital infusions given its moderate medium-term RoE and high-growth trajectory.

Exhibit 1: DHFL trades at 1.1X book FY2016E Key financial parameters, March fiscal year-ends, 2012-17E

Source: Company, Kotak Institutional Equities estimates

We expect the discount between DHFL and its peers to narrow

DHFL, India’s third-largest housing finance company, has a market share of 4% in housing

loans, trailing HDFC and LICHF. DHFL has reported 16-17% RoE in the past primarily due to

its focus on retail home loans (81% of total loans), which have lower yields and higher

borrowing costs. We expect DHFL to gain market share in housing finance on the back of

aggressive business expansion and reducing lending rates post the recent rating upgrade.

RoE will likely remain moderate at about 17% over the medium term. Steps taken by the

management to address investor concerns (eliminating cross-holdings with HDIL and the

induction of group management committee) will augur well for stock performance. We

compare DHFL with other housing finance companies.

DHFL’s focus is on the low-ticket business and a higher share of retail loans than HDFC.

DHFL is a smaller player than HDFC (3.8X PBR FY2016E for core business) and LICHF (2.3X

PBR FY2016E) with 4% market share in housing loans. HDFC and LICHF reported 15%

and 11% shares respectively in September 2015. LICHF has delivered RoE of 17-19%,

somewhat higher than DHFL’s. HDFC’s RoEs in the mortgage business are higher at 26-

30%. Both HDFC and LICHF have lower cost of funding as compared to DHFL due to

their parentage. A large share of non-individual loans (37% of total) supports HDFC’s

high profitability, in our view. LICHF has a negligible share of developer loans while stiff

competition in housing loans across large cities has kept its spreads in check.

PAT YoY Net worth EPS BVPS AUM YoY RoA RoE PER PBR

(Rs mn) (%) (Rs mn) (Rs) (Rs) (Rs bn) (%) (%) (%) (X) (X)

2012 3,064 16 20,327 26 176 210 49 1.6 16.9 15.8 2.4

2013 4,519 47 32,371 35 252 361 72 1.6 17.1 11.8 1.6

2014 5,322 18 35,749 41 278 448 24 1.3 15.6 10.0 1.5

2015E 6,490 22 40,924 51 322 557 24 1.2 16.8 8.2 1.3

2016E 7,523 16 46,922 59 373 676 21 1.2 16.9 7.1 1.1

2017E 8,718 16 53,874 68 432 814 21 1.1 16.9 6.1 1.0

Notes:

(a) We consider PAT, EPS, BVPS and ROE before deferred tax liability in the above.

Banks/Financial Institutions Dewan Housing Finance

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

DHFL has higher borrowing costs than Repco, but this will reduce from here. DHFL’s loan

book of `447 bn is almost 10X that of Repco Home Finance (4.5X PBR FY2016E). Both

players are focused on similar segments with average ticket sizes of `1 mn for each.

Share of retail home loans is similar too (80-83%). Repco delivered superior RoEs (20%)

due to its lower cost of funds—DHFL’s calculated borrowing costs were 10.4% in FY2014

against Repco’s 9.6%. DHFL’s recent rating upgrade will reduce its funding costs as well,

though its management favors market share gains over margins. Nevertheless, the

difference between valuation multiples between both players is very high and will reduce

from here due to DHFL’s rerating, in our view.

DHFL has a higher share of retail home loans than Indiabulls. Exhibit 2 shows that DHFL

and Indiabulls (2.3X PBR FY2016E) are almost similar in size in terms of loan book and

loan growth. However, DHFL is focused mainly on loans to lower segments with an

average ticket size of `1.1 mn (`1.7 mn on an incremental basis) against about `2.5 mn

for Indiabulls. Retail home loans comprise 81% of total loans for DHFL against 50% for

Indiabulls. Consequently, DHFL reported RoEs of 16-17%, lower than the 25% reported

by Indiabulls.

Exhibit 2: DHFL is a large player in the housing finance segment; its RoEs are lower than that of peers Key financial indicators, March fiscal year-end, 2014

Source: Company, Kotak Institutional Equities

(Rs bn) (Rs mn) (%) (%) (%) (%) (%)

DHFL 354 1.1 12.0 0.8 1.0 1.3 15.5

Gruh Finance 70 6.7 13.0 0.3 0.9 2.8 32.2

HDFC 1,333 2.2 10.5 0.7 0.3 2.6 20.6

Indiabulls Housing Finance 292 2.5 11.5 0.8 1.0 3.8 28.8

LIC Housing Finance 886 2.0 10.5 0.6 0.4 1.5 18.8

Repco Home Finance 38 1.0 11.0 1.5 1.0 2.8 15.9

Notes:

(a) Loan book refers to individual home loans.

Loan

book

Retail home

loan rate RoE

Gross

NPLs

Operating

expenses/ average

assets RoA

Average

ticket size



Exhibit 3:Key valuation metrics of banks and NBFCs March fiscal year-ends, 2014-16E

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 4: DHFL trades at a discount to most HFCs and NBFCs PBR and RoE, March fiscal year-end, 2016E


Target

price EPS (Rs) PER (X) ABVPS (Rs) APBR (X) RoE (%)

Reco. (Rs) US $bn 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Public banks

Bank of Baroda ADD 1,050 1,067 7.2 105 111 134 10.1 9.6 8.0 720 783 892 1.5 1.4 1.2 13.8 13.0 14.1

Bank of India ADD 320 288 2.9 42 59 66 6.8 4.9 4.4 332 362 419 0.9 0.8 0.7 11.2 13.5 13.5

OBC ADD 300 314 1.5 38 42 51 8.3 7.4 6.1 342 355 384 0.9 0.9 0.8 8.7 9.2 10.3

PNB REDUCE 180 204 5.8 92 126 29 2.2 1.6 7.1 154 152 168 1.3 1.3 1.2 10.2 12.4 13.1

SBI ADD 330 300 35.4 15 19 22 20.6 16.0 13.9 131 143 161 2.3 2.1 1.9 10.0 11.3 11.9

SBI incl. banking subs 308 280 33.1 18 22 26 15.8 12.6 10.7 155 170 192 1.8 1.7 1.5 9.9 11.0 11.8

SBI (core banking business) 275 250 29.5 14 18 21 18.0 13.9 12.0 122 135 152 2.0 1.9 1.6 9.7 11.4 11.9

Old private banks

City Union Bank ADD 105 97 0.9 6 7 8 15.2 13.4 12.3 35 44 50 2.8 2.2 1.9 18.9 17.9 16.0

DCB BUY 120 118 0.5 6 7 3 19.5 17.9 37.1 42 49 51 2.8 2.4 2.3 14.8 14.1 13.2

Federal Bank BUY 145 146 2.0 10 12 14 14.9 12.2 10.4 79 88 99 1.9 1.7 1.5 12.6 14.0 14.6

Karur Vysya Bank BUY 620 575 1.1 40 48 65 14.3 12.0 8.8 302 349 391 1.9 1.6 1.5 13.4 15.1 16.9

J&K Bank REDUCE 135 146 1.1 24 18 10 6.0 8.2 14.6 117 106 111 1.3 1.4 1.3 22.3 14.3 14.8

New private banks

Axis Bank ADD 525 499 18.6 26 29 35 18.8 16.9 14.2 160 183 211 3.1 2.7 2.4 17.4 16.9 17.5

IndusInd Bank ADD 800 792 6.6 27 34 39 29.6 23.5 20.1 162 190 223 4.9 4.2 3.6 18.0 19.1 18.8

HDFC Bank ADD 1,000 945 36.1 35 43 52 26.7 21.9 18.3 179 211 251 5.3 4.5 3.8 21.3 21.8 22.0

ICICI Bank BUY 400 338 31.0 17 19 22 19.9 17.8 15.2 123 135 149 2.8 2.5 2.3 14.0 14.3 15.2

ICICI standalone 300 260 23.8 15 16 19 17.6 15.9 13.4 102 114 128 2.5 2.3 2.0 14.8 14.7 15.5

Yes Bank ADD 680 757 5.0 45 44 48 16.9 17.1 15.9 197 279 315 3.8 2.7 2.4 25.0 19.7 16.0

Non-banks

Bajaj Finserv ADD 1,380 1,229 3.1 96 103 114 12.7 12.0 10.8 585 622 741 2.1 2.0 1.7 17.9 17.0 16.7

Cholamandalam ADD 500 480 1.1 26 27 36 18.8 17.6 13.3 147 193 217 3.3 2.5 2.2 17.3 15.8 16.8

Dewan housing finance BUY 540 415 0.8 41 51 59 10.0 8.2 7.1 262 302 348 1.6 1.4 1.2 15.6 16.8 16.9

HDFC ADD 1,210 1,099 27.3 35 41 48 31.5 26.6 22.9 179 201 226 6.1 5.5 4.9 20.6 21.8 22.6

HDFC core 623 15.5 30 33 38 20.9 18.9 16.4 121 142 167 5.2 4.4 3.7 26.8 26.7 27.9

IDFC BUY 200 154 3.9 12 10 9 12.9 15.3 17.1 99 109 117 1.6 1.4 1.3 12.8 10.0 8.1

IIFL Holdings BUY 175 166 0.8 9 14 16 17.7 11.9 10.1 74 84 95 2.3 2.0 1.7 14.0 18.5 19.1

LIC Hsg Fin ADD 450 457 3.6 26 31 36 17.5 14.9 12.6 145 168 196 3.2 2.7 2.3 18.8 18.0 18.9

L&T Finance Holdings ADD 80 66 1.8 3 5 6 19.1 13.4 11.8 34 37 42 1.9 1.8 1.6 10.5 13.9 14.2

Magma Fincorp ADD 135 108 0.3 7 9 12 15.1 11.4 9.0 79 87 97 1.4 1.2 1.1 9.7 11.2 13.3

Mahindra Finance SELL 260 313 2.8 16 17 20 19.9 18.2 15.6 87 100 115 3.6 3.1 2.7 18.6 17.8 18.2

Muthoot Finance BUY 235 196 1.2 21 18 22 9.3 10.7 8.7 115 130 144 1.7 1.5 1.4 19.0 15.4 16.4

Power Finance Corporation ADD 330 278 5.8 41 45 43 6.8 6.1 6.4 203 195 219 1.4 1.4 1.3 21.0 20.1 16.8

Rural Electrification Corp. ADD 350 318 5.0 47 55 54 6.7 5.8 5.9 207 222 248 1.5 1.4 1.3 24.6 23.7 19.6

SKS Microfinance ADD 400 416 0.8 6 16 20 64.2 25.3 20.5 42 83 104 9.8 5.0 4.0 16.5 27.2 21.4

Shriram City Union Finance REDUCE 1,550 1,983 2.1 86 90 114 23.0 22.1 17.4 490 639 738 4.0 3.1 2.7 19.8 16.6 16.5

Shriram Transport ADD 1,150 1,040 3.7 57 64 82 18.4 16.4 12.6 361 418 479 2.9 2.5 2.2 16.3 16.0 18.0

Market

cap.Price

7-Jan-15

REC

Mahindra Finance

PFC

Dewan

CholamandalamBajaj Finserv

Sundaram Finance

Muthoot

L&T Finance Holdings Magma

HDFC

10

13

16

19

22

25

- 1.0 2.0 3.0 4.0 5.0

Ro

E (%

)

PBR (X)

LIC Hsg Shriram Transport

SKS



Resolution of key investor concerns helps rerate the stock

DHFL has traded at 0.4-1.7X one-year forward PBR. The stock has appreciated by 24% in

the past three months but its valuations are still attractive. We believe the resolution of

investor concerns is driving the rerating.

DHFL’s management has eliminated cross-holdings with HDIL. Investors had raised

concerns regarding DHFL’s promoters and their association with the real estate industry.

DHFL used to be an affiliate of HDIL. HDIL defaulted to lenders and was rated ‘D’ by rating

agencies, raising concerns about the ability of DHFL to access (debt and equity) capital

markets.

DHFL separated from the Rakesh Wadhawan Group (promoters of HDIL) and is now part of

the Rajesh Wadhawan group. Rakesh Wadhawan, Chairman of HDIL, stepped down from

his position at DHFL in July 2009 and Kapil Wadhawan is now the Chairman of DHFL. The

groups have eliminated cross-holdings and are now discrete entities. The Rajesh Wadhawan

Group holds DHFL, Dheeraj Builders and a few businesses in the hospitality sector.

DHFL will not acquire new businesses; group management committee to oversee its

businesses. In FY2013, DHFL acquired the housing finance subsidiary of Deutsche Bank. In

FY2014, the company picked up a 50% stake in the life insurance business from DLF and

recently invested in Pramerica Mutual Fund. The management has said it would not acquire

any more businesses over the medium term.

DHFL aims to be a financial conglomerate with interests beyond housing finance for the LIG

segment. DHFL acquired Deutsche Bank’s housing finance business because it wanted to

diversify into the high end of the market. The acquisition enhanced DHFL’s presence in

North India.

DHFL also bought stake in a life insurance business to capitalize on the DHFL franchise. The

business is discussed in greater detail subsequently.

To manage the challenges and leverage synergies across its group companies, DHFL’s

holding company has inducted eminent professionals into its group management committee

(GMC). Exhibit 6 lists the professionals in the group management committee and their

backgrounds. These executives will provide strategic inputs to group companies; their rich

backgrounds will offer investors comfort.

Exhibit 5: DHFL has appreciated significantly but trades below its peak PER and PBR, March fiscal year-ends, 2011-15


0.0

0.4

0.8

1.2

1.6

2.0

0.0

2.4

4.8

7.2

9.6

12.0

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)



Exhibit 6: DHFL’s holding company has inducted senior professionals into the group’s management committee Members of GMC and their backgrounds


We value DHFL at `540/share, ~30% upside from current levels

We arrive at our March 2016E-based fair value estimate of `540/share – (1) `503/share

value for the lending business based on the residual growth model (RGM) and (2) `36/share

value for the life insurance business. DHFL will trade at 8.6X PER and 1.35X PBR FY2016E

(1.4X adjusted PBR FY2016E) at our target price.

We believe the RGM best captures high growth in loan book/earnings and high RoE.

We calculate the residual income for each year: (RoE-CoE) X beginning BVPS: `155.

We add the adjusted BVPS (as of March 2016E) to the residual income calculated above:

`348. In our adjusted book value calculated, we reduce net NPLs from net worth and add

back DTL created due to Section 36 (i) (viii) of the Income Tax Act.

We use a terminal growth rate of 7% to capture value beyond the high-growth phase

(FY2036E).

DHFL’s cost of equity works out to 14% (comparable with12-14% for most

banks/NBFCs). To arrive at the CoE, we use a risk-free rate of 7.5%, risk premium of

4.5% and beta of 1.3X.

Member Background Key position held

Milind Sarwate 30 years' experience with Marico, Godrej, Sanofi Aventis Former group CFO, Marico

K Srinivas30 years' experience in established entities including 14 years'

experience at Bajaj AutoFormer management committee member, Bajaj Auto

G Ravishankar 25 years' experience with Jet Airways, GE Capital and Geometric Former CEO and CFO, Jet Airways

Srinath Sridharan 16 years' experience 8+years with Rajesh Wadhawan Group; currenlty heads the

Group Chairman's Office

M Suresh30 years' experience in sales and distribution with TATA AIA Life,

HDFC Life and ITCFormer MD and CEO, TATA AIA



Exhibit 7: Our target price is based on the residual growth model Residual growth model for DHFL, March fiscal year-end, 2016E


Life insurance business adds `36-50/share of DHFL

DHFL recently acquired a 50% stake in DLF Pramerica Life Insurance; the company was

consequently renamed DHFL Pramerica. DLF, the Indian partner, held a 74% stake in the

company until December 18, 2013, after which it was sold to DHFL and its promoters. DHFL

holds 50% in the company and 24% is held by the promoters of DHFL. Prudential

International holds 26% in this company. According to NHB regulations, DHFL cannot hold

more than 50% shareholding in the life insurance business.

Negligible investments by DHFL. DHFL has offered its distribution network to DHFL

Pramerica. DHFL invested `310 mn in the life insurance business until September 2014.

While the initial transfer of 50% stake was for a token amount of `1, the company

subsequently infused `241 mn in the business and incurred acquisition expenses of `69 mn.

The acquisition expenses have been capitalized. DHFL’s promoters (through two group

companies, Yardstick Developers and Resources Reality) infused `115 mn into the life

insurance company until September 2014. DLF and Pramerica infused about `5.2 bn (~14X

the investment made by DHFL and its promoters) in the life insurance company over the past

four quarters.

Performance expected to improve. After the large capital infusion and takeover by DHFL,

we expect the life insurance company to deliver 75% APE growth in FY2015. The company

reported 72% APE growth in 1HFY15. Near-term growth will be driven by credit life group

insurance sold to DHFL’s mortgage customers; this will improve its GAAP profitability, as

well.

Stake in life insurance business adds `36-50/share of DHFL. Key assumptions for this

calculation: (1) APE growth of 75% in FY2015E and 10% yoy in FY2016E, (2) NBAP margin

of 11%, (3) structural value of 10-25X NBV, (4) business valuation at net worth + structural

value and (5) 10% holding company discount. We value the life insurance business at

`36/share in our target price.

Risk free rate 7.5

Beta 1.4

Risk premium 4.5

Discount rate 14.0

Terminal growth rate 7.0

Dividend payout 20%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 …… 2036 Terminal

Year 0 1 2 3 4 5 6 7 8 9 20 20

EPS 59 68 78 89 100 112 124 138 153 169 534 572

YoY (%) 16 16 15 14 12 12 11 11 11 11 11.0 7.0

BVPS 348 402 465 536 615 705 804 914 1,036 1,172 4,116 4,083

YoY (%) 15 15 16 15 15 15 14 14 13 13 11.6 0.0

Re*BVPS 42 49 56 65 75 86 99 112 128 145 515.6 0.8

Residual income 16 19 22 24 25 26 25 25 25 25 18.5 11.7

PV of FCF (Rs) 16 17 17 16 15 13 12 10 9 8 1 0.9

RoE (%) 18.0 18.1 18.0 17.8 17.3 16.9 16.4 16.0 15.7 15.4 13.7 14.0

Current ABVPS (Rs) 348

PV of residual income (Rs) 155

Fair value of business (Rs) 503



Exhibit 8: High APE growth in FY2015 Key assumptions for DHFL Pramerica, March fiscal year-ends, 2014-16E (` mn)


Exhibit 9: Life insurance business adds `36-50/share of DHFL

Estimate of value generated by DHFL Pramerica for DHFL


2014 2015E 2016E

APE 1,115 2,014 2,235

NBV 125 227 252

Net worth 3,511 7,421 7,721

Multiple to FY2016E NBV (X)

10 15 20 25

Valuation of insurance business (Rs bn) 10.2 11.5 12.8 14.0

Value per share of DHFL (Rs/share) 36 40 45 49

Valuation of DHFL (Rs/share) 540 543 548 552

Notes:

(a) We value the business at Net worth + structual value (10-25X NBV).

(b) We consider 50% stake and 10% holding company discount.


Private developers need incentives to address demand at the low end

The government’s aim to provide housing for all Indians calls for investment of `93 tn,

excluding land costs, to provide about 95 mn homes. The government will need to enlist

private-sector participation to achieve this ambitious plan. More specifically, success of the plan

depends on (1) incentives for developers, (2) higher floor area ratio (FAR) and densities and (3)

Central funds to cross-subsidize states (though land is a state subject) and (4) sustained political

commitment to the goal – which will automatically ensure that legal and regulatory

requirements fall into place.

Developers to stay strong in middle-high end markets; must tweak models to address low-end

Middle-income groups (MIG) and high-income groups (HIG) will consume 3.8-5 mn housing

units over 2012-22. Since 2008, over 90% of new housing in top seven metros was absorbed

and developers grew by expanding to newer locations. As the emphasis shifts to homes for the

masses, to grow, large developers will have to alter their business models to generate large

volumes and at low prices

Mumbai developers, especially HDIL, are best placed to benefit from any thrust on affordable

housing, though some are plagued by internal issues. We like Prestige and Sobha, among the

companies in our coverage universe, for their strong operations, but believe they are fairly

priced. We believe DLF’s operations are slated for recovery once the company corrects its

products and pricing. We have BUY ratings on DLF and Oberoi.

Housing finance companies are moving down the value chain

Housing finance companies are gradually moving towards the low end of the market, much of

this in suburban and small-town India. We expect housing loans in India to grow by 19% CAGR

over FY2014-22 to `35 tn. We find that maximum demand is for loans of `1-2.5 mn and over

`2.5 mn.

We initiate coverage on Dewan Housing Finance (DHFL) with a BUY rating (TP: `540). We

reiterate ADD on HDFC (TP: `1,210) and LICHF (TP: `450). We believe DHFL and Repco are

strong plays on latent demand in the low- to middle-income segment; HDFC and LICHF are well

placed in the mid- to high-end segments while Mahindra Housing Finance and Gruh Finance

are at the lowest end of the market.

Real Estate India

Housing for all by 2022—big opportunity in small housing. The Indian government

aims to provide 100 mn new units of primarily affordable housing by 2022 at a cost of

`108 tn. The government would be constrained to reach this goal on its own and

would need to incentivize private players. Private developers, hitherto riding high-end

demand, would have to change their business models to focus on volume rather than

pricing. The spurt in demand from middle- and low-income groups is likely to benefit

housing finance companies significantly.

ATTRACTIVE

JANUARY 09, 2015

THEME

BSE-30: 27,275

QUICK NUMBERS

Housing stock worth

`102-120 tn to come

onto the market in

the next decade

`40 tn market

potential for

organized

developers

Housing loans to

grow to `35 tn by

FY2022E



HOUSING FOR ALL BY 2022—BIG-TICKET OPPORTUNITY; INCENTIVES WOULD HELP

The Government of India aims to provide housing for all by 2022—this entails building about 100 mn homes,

about 95% of which will be in the Economically Weaker Section (EWS) and Low Income Group (LIG)

categories, at a cost of `108 tn. The government alone cannot provide this; consequently, incentivizing

private players is crucial. Private developers will need to re-focus their models on volumes rather than pricing.

Housing finance companies will benefit from strong demand as the sector moves towards the low end of the

market.

Housing for all by 2022E – daunting, but let’s look at the drivers…

India, like most developing and urbanizing nations, faces a large housing shortfall. Although

unlike its peers, the economy has grown rapidly over the past two decades, urbanization has

not kept pace with the growth. The pace of urbanization has lagged that of its peers, and

even today, about 30% of India’s population lives in cities versus an average of 50%

globally and over 70% in developing nations. About half the population is expected to

reside in cities by 2050, making the density in cities among the highest in the world. The

government faces a huge challenge, not only in meeting the housing shortage, but also in

planning and facilitating housing for millions who will move to urban areas over the next

two decades.

Several Indian governments have had housing on their agendas. The government that came

to power in May 2014 appears committed to achieving housing for all by 2022. Various

inter-ministerial and independent body discussions and consultations have been held but no

formal policy initiative has been released yet. However, the government indicated it would

release guidelines regarding incentives and subsidies to encourage private-sector

participation. We evaluate the scope of demand, investment required and investible ideas.

Exhibit 1: There is a mismatch between expenditure and value realizable for the EWS segment Housing shortfall (2007 and 2012), requirement, value and costs (excluding land)

Source: Kotak Institutional Equities estimates

More money is required to fund land and build EWS and LIG homes than the value realized

by selling them at government rates. Hence there is little participation from private

developers and government cannot fulfill this on its own. Further, households in the EWS

category are not funded by housing-finance companies. The government needs to address

this shortfall.

2007 2012 KIE (I) KIE (II) KIE (I) KIE (II) GOI KIE (I) KIE (II)

Shortage and requirement (mn)

EWS 21.8 10.6 19.8 19.8 54.2 56.6 45.0 31.5 36.0

LIG 2.9 7.4 24.1 27.6 42.1 46.9 50.0 33.2 37.5

MIG and above 0.0 0.8 3.3 4.7 3.8 5.3 5.0 3.6 5.0

Total 24.7 18.8 47.2 52.1 100.1 108.8 100.0 70.1 80.1

Value of units (Rs tn)

EWS 10.9 5.3 14.9 14.8 40.6 42.5 33.8 23.6 27.0

LIG 2.9 7.4 36.1 41.4 63.1 70.3 75.0 49.8 56.3

MIG and above 0.2 4.1 24.8 35.2 28.8 39.4 37.5 29.2 39.9

Total 14.0 16.8 75.8 91.4 132.5 152.2 146.3 102.6 123.3

Total (US$ tn) 0.2 0.3 1.3 1.5 2.2 2.5 2.4 1.7 2.1

Construction costs (Rs tn)

EWS 10.9 5.3 16.9 16.8 46.1 48.1 38.3 26.8 30.6

LIG 2.2 5.6 26.5 30.4 46.3 51.6 55.0 36.5 41.3

MIG and above 0.1 1.6 9.9 14.1 11.5 15.8 15.0 14.6 20.0

Total 13.1 12.5 53.3 61.2 103.8 115.5 108.3 77.9 91.9

Total (US$ tn) 0.2 0.2 0.9 1.0 1.7 1.9 1.8 1.3 1.5

Notes:

(a) Scenario KIE (I) is low-growth scenario for housing demand.

(b) Scenario KIE (II) is high-growth scenario for housing demand.

(c) Scenarios assuming housing shortage will still be there in EWS and LIG segments.

Total

2022E achievement (c)2022E requirement2022E requirement

Urban Total

Shortage



Housing growth will boost housing finance

We believe strong growth in housing, due to the government’s impetus, and large latent

demand will drive 19% CAGR in housing loans over FY2014-22E to `35 tn. Housing activity

will drive 20% yoy growth in disbursements of housing loans over FY2014-22E.

The LIG segment (loans of `1-2.5 mn) will be the key driver of disbursements, growing at

27% CAGR during the period. The middle and higher segment (loans over `2.5 mn) will

likely grow at 19% CAGR. Despite encouragement from the government and regulators, we

don’t think housing finance companies and banks will be able to cater to the low end of the

market (loans below `1 mn) as the lending models of housing finance companies are not

conditioned to lend to this segment. Interestingly, 15-17% of disbursements in the housing

finance sector claim 1% interest subvention scheme in the first year (loan up to `1.5 mn and

cost of dwelling up to `2.5 mn) but 5% annual subsidy for EWS/ LIG has limited success.

Exhibit 2: We expect the housing loan book to increase to `35 tn by FY2022 Outstanding home-loan book, March fiscal year-ends, 2011-22E (` tn)


5 68

910

1214

17

20

24

29

35

0

8

16

24

32

40

20

11

20

12

20

13

20

14

20

15

E

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

20

22

E



VALUATION: ATTRACTIVE PLAYS AMONG HOME FINANCE COMPANIES AND DEVELOPERS

Most Indian developers are asset heavy, with land banks. Notably, over the years, value contributions from

ongoing and forthcoming projects have increased. Adjusted to land, most developers make healthy project-

specific RoEs. We have BUY ratings on DLF, anticipating its recovery, and on Oberoi, on attractive valuations.

For HFCs, we believe high volumes and profitability are key drivers. We initiate coverage of DHFL with a BUY

rating and target price of `540. We retain our ADD ratings on HDFC and LICHF.

Developers – low base, volume expansion to result in better cash flows

Most organized developers (listed and large unlisted) have been focusing on the mid-income

and luxury housing segments. Gaining market share and expanding into new markets have

been reasons for growth. Ashiana Housing, Ansal Properties, HDIL and Provident Housing

(wholly owned subsidiary of Provident Housing) are the only developers in the listed space

with some focus on the LIG segment—with added incentives, we believe they will gain. For

most others, compulsory inclusion of houses in the EWS/MIG segment for higher FSI/FAR in

projects is the only way to contribute to the bottom of the pyramid.

Exhibit 3: Most developers trade at a discount to the adjusted PBV Valuation of developers (update table last), March fiscal year-ends, target price as on March 2016

Source: Companies, Kotak Institutional Equities estimates

In the KIE universe, we like the operations of Prestige and Sobha, which are growing and

consistently generating positive cash flow from operations, but believe they are fairly valued.

DLF continues to bleed at the operations level, but we believe a recovery, led by volume

growth and Gurgaon, is 3-4 quarters away. We maintain our BUY rating on DLF, primarily

on the anticipated operational recovery over the next four quarters.

We believe Oberoi has been managing its pace of construction and collections well, but its

products are too expensive to generate large volumes (besides, it is present only in Mumbai).

New launches in the suburbs will drive volumes. Consistent business development is crucial

for Oberoi, as we believe the management has been weak on that front. We maintain our

BUY rating as we believe—even at conservative sales estimates and with no business

development assumptions—the stock has good upside.

Godrej Properties has changed its business model in the past two years and is now more

prudent in its investments. Its focus on residential only developments in key metros will

improve operational parameters in the coming quarters. However, we believe the stock

trades ahead of its operating recovery cycle, and we maintain our REDUCE rating.

CMP Target price NAV

Developer Rating (Rs) (Rs) 2014 2015E 2016E 2014 2015E 2016E (Rs) Ongoing FC Leased LB

DLF BUY 134 210 154 154 155 0.9 0.9 0.9 210 17 11 19 52

GPL REDUCE 252 225 90 98 106 2.8 2.6 2.4 225 50 21 — 29

Oberoi BUY 269 325 134 148 172 2.0 1.8 1.6 325 45 35 15 5

Prestige REDUCE 220 240 85 106 120 2.6 2.1 1.8 240 14 28 32 26

Sobha ADD 458 540 234 249 279 2.0 1.8 1.6 540 33 31 — 36

Sunteck ADD 269 410 91 115 194 2.9 2.3 1.4 410 57 38 — 5

Brigade NR 142 NR 113 125 146 1.3 1.1 1.0 NA NA NA NA NA

KPDL NR 189 NR 100 120 139 1.9 1.6 1.4 NA NA NA NA NA

HDIL NR 67 NR 252 263 276 0.3 0.3 0.2 140 32 32 1 35

MLIFE NR 473 NR 309 355 389 1.5 1.3 1.2 NA NA NA NA NA

Puravankara NR 82 NR 92 97 105 0.9 0.8 0.8 130 20 40 — 40

Unitech NR 17 NR 38 46 47 0.4 0.4 0.4 20 18 20 2 60

Book value/share (Rs) Price-to-book ratio (X) (%) contribution from

Business for private

developers will thrive

on volume, not

pricing



Exhibit 4: Strategy review needed to increase volumes Developers’ sales, March fiscal year-ends, 2011-17E (mn sq. ft)


DLF has recently lowered product prices in its core market and Sobha has announced the

launch of Aspirational Homes, a lower ticket-size offering, unlike Sobha’s traditional super-

luxury products. Puravankara continues to develop affordable housing under its brand

Provident Housing, and in the Mumbai Metropolitan Region (MMR), HDIL is likely to launch

projects under this segment.

Housing finance companies – high growth and profitability drive valuations

We believe high growth and core profitability are main valuation drivers for housing finance

companies (HFCs). HFCs profiled in this report delivered high (20%+) loan growth over the

past few years due to strong latent demand and a small base for most players.

Diversification into high-yield businesses like LAP or strong parentage (implying higher credit

rating) has boosted interest spreads and RoA. Unlike banks, asset quality performance may

not be a key stock driver as most companies reported low gross NPLs (~1% or lower). We

initiate coverage of DHFL with a BUY rating and target price of `540. We retain our ADD

rating on HDFC and LICHF.

Exhibit 5: Valuation comparison of housing finance companies March fiscal year-ends, 2014-16E


Exhibit 6: HFCs deliver RoEs of 15-32% Du Pont comparison of HFCs, March fiscal year-ends, 2014 (% of total assets)


2011 2012 2013 2014 1HFY15 2015E 2016E 2017E

DLF 10.3 13.6 7.2 3.8 1.0 4.0 6.6 7.8

Unitech 9.1 7.2 5.5 2.3 0.9 2.0 2.3 3.0

Godrej 3.2 2.4 3.5 3.0 2.5 4.0 6.1 5.8

Oberoi 0.7 0.7 0.5 0.3 0.1 0.7 1.8 2.2

Sunteck 0.3 0.3 0.3 0.2 0.1 0.4 0.7 0.7

Prestige 1.9 4.9 6.0 6.1 4.2 7.5 7.7 8.4

Purankara 2.9 2.4 3.9 3.6 1.7 4.2 4.5 5.0

Sobha 2.8 3.3 3.8 3.6 1.6 4.0 5.4 5.6

Target

price CMP

Market

Cap

Rating (Rs) (Rs) (US$ bn) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

DHFL BUY 540 415 0.8 41 51 59 10.0 8.2 7.1 278 322 373 1.5 1.3 1.1 15.6 16.8 16.9

Gruh Finance NC NR 286 1.6 5 8 6 58.3 36.6 46.3 17 21 25 17.0 13.7 11.3 32.2 29.9 29.1

HDFC ADD 1,210 1,099 27.3 35 41 48 31.5 26.6 22.9 179 201 226 6.1 5.5 4.9 20.6 21.8 22.6

Indiabulls Housing Finance NC NR 498 2.8 47 55 61 10.6 9.0 8.1 171 184 209 2.9 2.7 2.4 28.8 31.9 31.1

LIC Housing Finance ADD 450 457 3.6 26 31 36 17.5 14.9 12.6 149 174 203 3.1 2.6 2.3 18.8 18.0 18.9

Repco Home Finance NC NR 676 0.7 18 21 26 38.1 32.5 26.0 119 132 155 5.7 5.1 4.4 16.0 16.9 18.4

EPS (Rs) PER (X) BVPS (Rs) PBR (X) RoE (%)

DHFL HDFC

Gruh

Finance

LIC

Housing

Finance

Indiabulls

Housing

Finance

Mahindra

Housing

Finance

PNB

Housing

Finance

Repco

Home

Finance

NII 2.5 2.7 4.3 2.2 5.1 9.2 2.6 4.9

Provisions 0.2 0.0 0.0 0.0 0.7 0.9 0.3 0.6

NII post provisions 2.32 2.67 4.28 2.13 4.40 8.25 2.29 4.35

Operating expenses 1.0 0.3 0.9 0.4 1.0 6.7 1.1 1.0

Fee and other income 0.5 1.2 0.4 0.3 1.4 1.7 0.6 0.4

PBT 1.8 3.5 3.8 2.1 4.8 3.2 1.8 3.8

(1-tax rate) 0.7 0.7 0.7 0.7 0.8 0.7 0.7 0.7

RoA 1.3 2.6 2.8 1.5 3.8 2.4 1.3 2.8

Average asset/ average equity (X) 11.7 8.0 11.7 12.6 7.6 11.5 12.6 5.7

RoE 15.5 20.6 32.2 18.8 28.8 27.3 16.4 15.9



We believe DHFL and Repco are strong plays on latent demand in the LIG segment. Repco

trades at 4.4X PBR FY2016E. It reported strong 2.8% RoA in FY2014 on high spreads due to

its exposure to self-employed segments (half its loans). RoEs are lower (16%) mainly due to

lower leverage (average asset-to-equity ratio 5.7X). DHFL trades at an inexpensive 1.1X PBR

FY2016E. It reported 30% loan-book CAGR over FY2010-14 on strong organic growth and

the First Blue Home Finance merger. RoA (1.3% in FY2014) was lower than peers on higher

borrowing costs and operating expenses ratio.

Exhibit 7: Most HFCs trade at 1-4.5 PBR PBR and RoE of HFCs, March fiscal year-ends, 2016E

Source: Bloomberg, Companies, Kotak Institutional Equities estimates

Key players

HDFC - reiterate ADD. We value HDFC’s core mortgage business at 3.8X PBR FY2016E

for core RoE of over 28%. We retain our ADD rating with price target of `1,210.

LICHF - reiterate ADD. It trades at 2.3X PBR FY2016E; we retain our ADD rating on

LICHF with a price target of `450. We expect LICHF to deliver 1.4% RoA and 18-20%

RoE. PNB Housing Finance, which is unlisted, also operates in this segment.

DHFL - initiate coverage with BUY rating. We find high growth at DHFL (22% loan-

book CAGR over FY2014-17E to `814 bn) supported by huge untapped demand in the

LIG and MIG segments. We expect DHFL to deliver 18% EPS CAGR and 1.2-1.3% RoA and

17% RoE over FY2015-17.We initiate coverage with a BUY rating and price target of `540.

We like the business models of Mahindra Housing Finance and Gruh Finance, which lend

to the lowest end of the market (loans below `1 mn). Both companies reported high RoE

(27-32%).

Gruh trades at high valuations (11.3X PBR FY2016E) and Mahindra Finance is unlisted.

Gruh

HDFC

Repco

Indiabulls

15

19

23

27

31

35

- 2.0 4.0 6.0 8.0 10.0 12.0

Ro

E (%

)

PBR (X)

LIC Hsg Fin

DHFL



HOUSING FOR ALL BY 2022: THE GOVERNMENT’S AMBITIOUS AGENDA

The Indian government aspires to provide housing for all by 2022. To achieve its target, about 100 mn homes

must be built, 95% of which will be in the EWS and LIG categories, which are simply not profitable for private

players. Incentivizing private players is crucial as the government alone cannot garner funds for such an

agenda. We evaluate the scope of demand, investment required and investible ideas.

About 100 mn units required by 2022E

According to the government, the housing shortfall may be 30 mn units by 2022. Recent

presentations by government and industry bodies indicate the need to construct 100 mn

units by 2022 to provide housing for all. Most of the requirement will be in the EWS and LIG

segments.

Exhibit 8: We estimate 96-102 mn houses will be needed in the EWS and LIG segments by 2022 Housing units: shortage (as on 2007 and 2012) and requirement by 2022E (various scenarios) (mn units)

Source: Planning Commission, Kotak Institutional Equities estimates

Based on this estimated requirement, the value of the housing requirement may be as high

as `152 tn. Our estimates indicate the EWS and LIG segments will have to arrange `103-113

tn until 2022 if the units are constructed.

Exhibit 9: `51-56 tn will be required to buy EWS and LIG segment homes in urban areas Value of units (` tn)


Assuming the housing shortfall is met by 2022, as much as `115 tn will be required

(excluding the land cost) to construct. Out of this about `100 tn will be required for the EWS

and LIG segments. Land requirement, based on an FAR of the two segments, could be

about 31 bn sq. feet. As the urban development ministry has only `3.5 tn allocated in the

Twelfth Five Year Plan, allocating even twice as much in the Thirteenth Five Year Plan will

make little difference. Consequently, we believe the government will have to involve more

private-sector participation and incentivize it to participate in such development and help

government achieve its target.

Shortage and requirement 2007 2012 KIE (I) KIE (II) KIE (I) KIE (II) GOI KIE (I) KIE (II)

EWS 21.8 10.6 19.8 19.8 54.2 56.6 45.0 31.5 36.0

LIG 2.9 7.4 24.1 27.6 42.1 46.9 50.0 33.2 37.5

MIG and above 0.0 0.8 3.3 4.7 3.8 5.3 5.0 3.6 5.0

Total 24.7 18.8 47.2 52.1 100.1 108.8 100.0 70.1 80.1

Notes:



Total

2022E achievementShortage 2022E requirement 2022E requirement

Urban Total

2007 2012 KIE (I) KIE (II) KIE (I) KIE (II) GOI

EWS 10.9 5.3 14.9 14.8 40.6 42.5 33.8

LIG 2.2 7.4 36.1 41.4 63.1 70.3 75.0

MIG and above 0.2 4.1 24.8 35.2 28.8 39.4 37.5

Total 13.3 16.8 75.8 91.4 132.5 152.2 146.3

Total (USD tn) 0.2 0.3 1.3 1.5 2.2 2.5 2.4

Notes:



Urban Total

Shortage 2022E requirement 2022E requirement



Exhibit 10: `42-47 tn (excluding land cost) will be required to build the homes in urban areas Cost required to build homes (` tn)


Old agenda, renewed emphasis

India’s urban population has grown rapidly over the past few decades. About 30% of the

population lives in urban areas and we estimate 40% of the population will live in urban

areas by 2030. The government expects half of the population to live in urban India by

2050. 47-52 mn new units will be required to cater to the population shifting to urban

centers.

Exhibit 11: The urban population has expanded rapidly over decades India-population growth, urban and rural, calendar year-ends, 1901-2031E (mn)

Source: Census of India, Planning Commission, Kotak Institutional Equities estimates

India is the least urbanized nation among its developing peers. The Indian economy has

grown well but the rate of urbanization over the past few years has been slower than peers.

Exhibit 12: India’s urbanization has been slower than peers Urbanized population, calendar year-ends, 1960- June 2014 (%)

Source: UN, Kotak Institutional Equities

2007 2012 KIE (I) KIE (II) KIE (I) KIE (II) GOI

EWS 10.9 5.3 16.9 16.8 46.1 48.1 38.3

LIG 2.2 5.6 26.5 30.4 46.3 51.6 55.0

MIG and above 0.1 1.6 9.9 14.1 11.5 15.8 15.0

Total 13.1 12.5 53.3 61.2 103.8 115.5 108.3

Total (USD tn) 0.2 0.2 0.9 1.0 1.7 1.9 1.8

Notes:



Shortage 2022E requirement 2022E requirement

Urban Total

0

200

400

600

800

1,000

1,200

1,400

1,600

19

01

19

11

19

21

19

31

19

41

19

51

19

61

19

71

19

81

19

91

20

01

20

11

20

21

E

20

31

E

Total Rural Urban

1960 1970 1980 1990 2000 2010 2014

China 16 17 19 26 36 49 54

India 18 20 23 26 28 31 32

Brazil 46 56 65 74 81 84 85

Russia 54 62 70 73 73 74 74

Mexico 51 59 66 71 75 78 79

Argentina 47 48 48 52 57 62 63

Indonesia 15 17 22 31 42 50 53

Nigeria 16 23 29 35 42 49 51

Philippines 30 33 37 49 48 49 50

South Africa 47 48 48 52 57 62 63

47-52 mn housing

units will be required

in urban India over

the next decade



We expect urbanization to grow faster than the population in the next two decades. Even

so, India’s urban population will be less than the world average or other developing nations.

Exhibit 13: India is still not as urbanized as other countries Population living in urban centers (% of population)

Source: UN, Kotak Institutional Equities estimates

High population and less land are the main issues before India’s urbanization and hence a

hurdle to resolving the urban housing shortage. Excluding China, the density in the top five

countries with the largest area is below 60 people/sq. km. In India it is over 2.5X that of

China, which is over 2.5X the next five (see Exhibit 14). India’s pace of urbanization may be

constrained if the housing problem is not dealt with in coming years. Along with the

housing problem, there could be socio-economic issues, as well.

Exhibit 14: High population and low land area are among India's worries Population, urban population and density of population, as on June 2014

Source: UN, Kotak Institutional Equities

Economic growth and large-scale migration to urban centers have always resulted in a

shortfall of quality homes. Over the past two decades, the rate of urbanization has outpaced

the rate of population growth and hence has increased the shortfall manifold (see Exhibit

15). The Twelfth Five Year Plan estimates the housing shortage to be 18.78 mn units. As per

the government, at the same pace of development, the housing shortage will increase to

around 30 mn units by 2022. Also, the slum population is expected to grow from 93 mn in

2011 to over 104 mn in 2017.

Country Urban/Total Population (%)

World 50

More developed regions 75

Less developed regions 45

South East Asia 47

China 54

India 2011 31

India 2021E 36

India 2031E 39

India 2051E 46

Population Density

(mn) (mn) (%) (per sq km)

China 1,394 756 54 145

India 1,267 410 32 386

Indonesia 253 134 53 53

Brazil 202 173 85 24

Nigeria 179 92 51 193

Mexico 124 98 79 63

Philippines 100 50 50 334

South Africa 53 34 63 44

Argentina 42 39 93 15

The G8 nations

United States 323 268 83 34

Russia 142 106 74 8

Japan 127 118 93 336

Germany 83 61 74 232

United Kingdom 63 51 80 261

France 65 56 87 117

Italy 61 42 69 203

Canada 36 29 81 4

Urban population



Exhibit 15: Shortage of homes in urban India has increased multifold over the past two decades Shortage of homes in urban centers, sixth to twelfth five-year plans, (mn)

Source: Planning Commission, Kotak Institutional Equities estimates

The government classifies the housing issue as those who live in (1) non-serviceable katcha

(temporary) houses, (2) obsolescent houses, (3) congested conditions, and those who are

homeless. Compared with the last five-year plan, the number of homeless people has fallen.

Congestion has increased with more people living in fewer houses.

Exhibit 16: Housing shortage is high due to the congestion factor Classification of the urban housing shortage, 2007 and 2012 (mn)

Source: Planning Commission, Kotak Institutional Equities

To categorize housing requirements the government classifies households as follows—the

Economically Weak Section (EWS), Low Income Group (LIG), Middle Income Group (MIG)

and the High Income Group (HIG). Housing in India is provided by public and private

enterprises, private enterprises have focused on the MIG-and-above segment. Governments

have run various schemes to provide housing to all, including construction and financial

assistance, but there has always been a shortage of homes. This shortfall has increased more

in urban areas due to the high rate of migration to cities.

Exhibit 17: The EWS and LIG segments account for 95% of the housing shortage Urban housing shortage as on 2007 and 2012 (mn)


0

5

10

15

20

25

30

1980 1985 1992 1998 2002 2007 2012

Urban housing shortage

Housing shortage categories 2007 2012

Non-serviceable katcha houses 2.2 1.0

Households living in obsolecent houses 2.4 2.3

Households living in congested houses, requiring new homes 12.7 15.0

The homeless 7.5 0.5

Total 24.7 18.8

Housing shortage 2007 2012

EWS 21.8 10.6

LIG 2.9 7.4

MIG and above 0.0 0.8

Total 24.7 18.8

The housing shortage

is likely to increase

with increased

urbanization



Larger states have bigger housing problems

The housing shortfall is seen to be highest in the most populous states and states that

generate high employment. The top 10 states account for over three-fourths of the housing

shortfall in India (see Exhibit 18). Besides, the participation of organized developers is

restricted to select cities, many of which have low housing shortages. Other than Mumbai,

Kolkata and Chennai, most urban housing shortages are in cities and states where

organized large developers are not present. Government-led construction (along with self-

owned individual houses) is the only source of housing development in such states.

Exhibit 18: The top 10 states account for three-quarters of the housing shortage State-wise housing shortage, as on 2007 and 2012 (mn units)


We expect the most populous states to remain so, as though we expect population growth

to decline over the next two decades, the population will increase either in industrialized

states due to migration, and in otherwise backward states, where people are uneducated.

Exhibit 19: Most populous states to remain so Population - select states and total, calendar year-ends, 2001-31E (# mn)

Source: Census, Kotak Institutional Equities estimates

Housing for all by 2022: several initiatives by governments in the past

Until the 1970s, the government’s role was restricted to providing housing to its own staff

and low-income industrial workers at subsidized rates. Over the years, as urbanization

increased, the government initiated schemes, directly and by offering state government help

to provide housing and financial assistance to EWS and LIG segments. For instance, the

government announced the establishment of the Credit Risk Guarantee Fund Trust to fund

people in EWS and LIG sections to get loans of up to `0.5 mn. The Central Government

plans to invest `450 bn and an equal amount is expected to be paid from the RAY scheme.

State 2007 2012 Remark

Uttar Pradesh 2.4 3.1 Developers only in Noida (where housing is organized, little shortage)

Maharashtra 3.7 1.9 Organized developers participate

West Bengal 2.0 1.3 Maximum shortage in Kolkata, local developers active but no participation

Andhra Pradesh 2.0 1.3 Political and legal issues stalled most development

Tamil Nadu 2.8 1.3 Organized developers present only in Chennai, none participate

Bihar 0.6 1.2 Organized developers not present

Rajasthan 1.0 1.2 Organized developers not present

Madhya Pradesh 1.3 1.1 Organized developers not present

Karnataka 1.6 1.0 Presence restricted to Bangalore, no participation

Gujarat 1.7 1.0 Organized developers not present

Others 5.6 4.5 Organized developers not present

Total 24.7 18.8

2001 2011 2021E 2031E

Uttar Pradesh 166.2 199.6 231.6 255.9

Maharashtra 96.9 112.4 125.4 135.8

West Bengal 80.2 91.3 100.9 109.3

Andhra Pradesh 76.2 84.7 91.7 97.3

Tamil Nadu 62.4 72.1 76.6 81.3

Bihar 83.0 103.8 120.5 121.3

Rajasthan 56.5 68.6 79.6 89.7

Madhya Pradesh 60.3 72.6 83.4 93.1

Karnataka 52.9 61.1 67.5 73.1

Gujarat 50.7 60.4 68.0 75.2

Others 242.4 283.5 324.3 363.9

Total 1,027.6 1,210.2 1,369.6 1,495.9



Exhibit 20: Schemes initiated by the government for the urban poor Schemes initiated by the government in the respective five-year plans


Government of India started the JNNURM project in December 2005 (the Tenth Five-year

Plan) to assist cities and towns in taking up housing and infrastructure facilities for the urban

poor. It was to be a seven-year mission and on completion the government intended all

urban poor to have housing and basic sanitation. In 2007, the government started the

NUHHP to earmark land for EWS/LIG groups in new housing projects. Shortfall still remains.

In the schemes launched since the Tenth Five Year Plan, over 1.5 mn housing units were

approved, out of which 0.64 mn were completed (0.42 mn of which area occupied) and 0.4

mn are under construction. Although the government constructed and allotted houses,

rapid urbanization resulted in proliferating slums, congested homes and in a shortage of

homes in urban centers. (a) Slum dwellers, (b) the urban poor, living in non-slum areas,

(c) prospective migrants and (d) the homeless and destitute comprise the homeless.

National Housing Bank (NHB) was set up in 1987 as an apex institution for housing finance

after the Seventh Five-year Plan (1985-90) identified the non-availability of long-term

individual finance as a major hurdle impeding progress of the housing sector. Apart from

being a regulator for housing-finance companies, NHB supports the housing-finance sector

by extending refinance to primary lenders in respect of eligible housing loans and direct

lending to public housing. NHB also operates schemes to incentivize the poor.

Five-year

plan Major initiatives

2 UCD pilot project

3 Loans to state govenments to acquire land for LIG

Establishment of HUDCO to fund housing and urban programs

EIUS to provide basic amenities to slums

ULCA enacted to prevent concentration of land holdings in urban areas

EIUS was transferred to state governments

IDSMT launched to provide infrastructure to towns with populations of less than 100,000

UBS started in 1981 to cater to basic needs of urban poor

First attempt to reduce urban poverty:

(a) employment creation in EWS and LIG communities

(b) housing and shelter upgradation

(b) social development planning with focus on women and children

(d) environmental upgradation of slums

Two schemes launchedin 1990: (i) NRY and (ii) UBSP

Annual

(1991-92)

Amended article 243W - urban poverty alleviation, slum upgradation and protection of EWS as functions

of municipal bodies

PMIUPEP started in 1995 to improve quality of life of urban poor

NSDP launched in 1996 to offer additional central assistance to states

SJSRY launched in 1997

Mega city schemes launched in 1997

VAMBAY launched in 2001 upgrade shelter of slum dwellers

JNNURM launched in 2005 for infrastructure development

NHUUP in 2007 to provide housinig to EWS and LIG categories

RAY launched in 2009 for slum dwellers and urban poor

AHP launched in 2009 for private-sector participation in generating affordable housing stock

Aim became a Slum-free India

Objectives of the plan

(a) provide shelter to all

(b) make provisions for land for the poor in the master plan

(b) provide basic services to migrant workers

RRY launched in 2013 - interest subsidy of 5% for EWS and LIG categories

ISHUP launched to provide homes with central government subsidy to EWS and LIG categories

10

11

12

4

5

6

7

8

9



Incentives and subventions drive housing loans

The government offered borrowers several incentives in the form of tax rebates and

subventions, increasing demand for housing loans.

Tax incentives reduce the effective cost of loans for borrowers. The government has

incentivized home loans by offering tax rebates (see Exhibit 21) that benefit borrowers of

home loans of `1-3 mn most. Exhibit 22 shows that effective home loan rates after

factoring the incentives will be 4.9% in FY2014 against 8% in FY2002.

Exhibit 21: Several incentives for home loan borrowers Incentives on home loans for individuals

Source: Kotak Institutional Equities

Exhibit 22: Tax incentives have reduced the effective rate of interest on housing loans Calculation of effective rate of interest on housing loans, March fiscal year-ends, 2000, 2002, 2015 (` mn)

Source: HDFC, Kotak Institutional Equities estimates

NHB operates several schemes to incentivize the poor. To encourage housing loans

in the low end of the market, the government has several schemes that offer interest

subvention. Subvention of loans of more than `1.5 mn seems to have strong demand

while subsidies for lower ticket loans, despite being more attractive, have lower off-take.

1% interest subvention scheme on small loans. The 1% interest subsidy scheme

(1% ISS) offers 1% subsidy for loans up to `1.5 mn in the first year, where the cost of

dwelling is up to `2.5 mn. NHB disbursed `3.81 bn under this scheme in FY2013. A

back-of-the-envelope calculation suggests the 1% subvention scheme covers 15-17%

of disbursements in housing finance (see Exhibit 23).

Maximum

quantum

Maximum value

of property

Maximum

value of loan

Scheme/incentive (Rs mn) (Rs mn) (Rs mn)

Exemption on interest repayment u/s 24 of Income Tax Act 0.20 NA NA

Deduction on principal repayment u/s 80C of Income Tax Act 0.15 NA NA

Dedcution on interest repayment u/s 80 EE of Income Tax Act (1) 0.10 0.40 0.25

1% interest subvention on home loans 0.25 0.15

Notes:

(a) Applicable only on loans approved in FY2014 to first-time individual buyers.

2000 2002 2015

Loan 2.0 2.0 2.0

Nominal interest rate 13.75 10.75 10.15

Maximum deduction for interest 0.075 0.15 0.2

Deduction on principal 0.02 0.02 0.15

Applicable tax rate 34.5 31.5 30

Tenor (years) 15 15 15

Total amount paid/year 0.307 0.269 0.353

Interest component 0.265 0.215 0.203

Principal repaid 0.042 0.054 0.15

Tax saved 0.032 0.053 0.1059

Effective interest paid on home loans 0.233 0.162 0.0971

Effective interest on home loans 11.7 8.1 4.9



Exhibit 23: About 17% of the loans disbursed claim 1% interest subsidy benefit Interest payout and disbursements under 1% interest subsidy scheme, March fiscal year-ends, 2011-13

Source: NHB, Kotak Institutional Equities

5% subsidy to EWS/LIG segments. In December 2008 the Ministry of Housing and

Urban Poverty Alleviation introduced an interest-subsidy scheme for housing the urban

poor (ISHUP). The scheme provides 5% subsidy a year for loans up to `0.1 mn to the

EWS (annual income up to `0.1 mn)/LIG (annual income up to `0.2 mn) categories.

After FY2012, the Rajiv Rinn Yojana replaced this scheme—the new scheme increased

the cap of 5% annual interest subsidy to loans of `0.8 mn; the subsidy is provided on

an NPV and upfront basis. Despite the large subvention, cumulative disbursements

under this scheme were only `87 mn across 9,126 beneficiaries in March 2013. The

scheme is restricted to the EWS and LIG categories.

Credit-risk guarantee fund for low-income housing. The Ministry of Housing and

Urban Poverty Alleviation also offers a scheme to guarantee housing loans up to `0.5

mn for households in the EWS/LIG categories for houses of up to 430 sq. feet.

State governments, in addition to the regular compulsive EWS developments, have

launched affordable housing schemes.

In Haryana, the Affordable Housing Policy 2013 encourages group housing schemes,

in which apartments of a pre-defined size are sold at pre-defined rates and completed

in a stipulated timeframe (for instance, projects should be completed within four years

from the granting of building-plan approvals and EC). In a residential locality, no more

than 5% of the area is allocated for such projects with maximum FAR allowed of 2.25

and maximum ground coverage of 50%.

Similarly Gujarat launched the Slum Rehabilitation Policy in 2013 on the lines of the

PPP model in Mumbai.

In 2014, Maharashtra cleared a regulation that prescribes 20% of housing reservation

in large projects for the EWS segment.

The Uttar Pradesh government runs the Awaas Yojna across various cities.

Renewed thrust on housing for weaker sections

At a recently held national conclave of ministers and secretaries (Center and states), the

government said it aspired to provide housing for all by 2022. To achieve this ambitious

target, the conclave emphasized (a) co-operation of the Center and state governments,

financial institutions and the private sector, (b) provision of fiscal and non-fiscal support,

(c) rationalized approval processes, (d) encouragement of private-sector participation,

(e) completion of ongoing housing schemes, (f) encouragement of the state governments to

increase in FSI/FAR for development of affordable housing and amending master plans to

include affordable housing sectors and (g) preparation of a comprehensive housing policy

(merging other schemes).

Interest subsidy paid out (Rs mn)

Loans

disbursed

Total

disbursements

during the year

Loan/ total

disbursements

Bank HFCs Total (Rs mn) (Rs mn) (%)

2011 212 173 384 38,400 1,603,250 2

2012 1,701 1,298 3,000 300,000 1,746,000 17

2013 2,819 990 3,810 381,000 2,221,200 17



Private-sector focus on the middle-income and more affluent segments

Although the requirement of EWS and LIG is high, the MIG and HIG segments have also

been growing. Almost all private developers concentrate only on the MIG and HIG segments

for profitability and availability of credit from HFCs and SCBs to buyers in the segments. Out

of over 2.4 mn units launched by developers in the top seven metros between July 2007 and

July 2014, only 2,400 units were launched at a ticket-size of `500,000—thus catering to the

EWS segment as a build-and-sell model. About 36,000 units were in the less-than-`1 mn

segment, (less than 2% of market supply).

Exhibit 24: There is no supply from private developers in the

EWS category Launches - total and those classified as EWS segment (units)

Notes: (a) Data from top seven metros only.

Source: Prop Equity, Kotak Institutional Equities

Exhibit 25: Less than 1.5% of housing supply is in the LIG

segment Launches - total and those in the LIG segment (units)

Notes: (a) Data from top seven metros only.


0

200

400

600

800

1,000

1,200

1,400

0

100,000

200,000

300,000

400,000

500,000

600,000

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(a)

Total (LHS) EWS (RHS)

0

2,000

4,000

6,000

8,000

10,000

12,000

0

100,000

200,000

300,000

400,000

500,000

600,000

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(a)

Total (LHS) EWS & LIG (RHS)

Less than 2% of the

total supply in the top

seven metros is in the

EWS and LIG

segments



CHALLENGES: FUNDING AND REGULATORY HURDLES

Paucity of funds for construction and lack of loans for buyers constrain the housing-for-all program. The

government does not have the funds (an estimated `93 tn) to build the homes. Besides, government policies

on housing flip-flopped, resulting in litigation. Hence, private-sector developers and HFCs focus on the MIG

and HIG segments.

What prevents the private sector from funding supply and demand?

Expensive land. The scarcity of land, cheap enough to build affordable housing, is a big

hurdle to the development of affordable housing. Most land parcels located near densely

populated areas and industrial and commercial destinations are expensive. This leaves no

incentive for a private developer to construct such homes. We believe government

policies and issues of urban planning are main reasons for the scarcity of land.

No construction margins. Private players and developers are unlikely to make money

even if land is awarded free only for construction of EWS or LIG projects as basic

construction costs of the units are higher than value recoverable from sale of such units.

Exhibit 26: No margins to be made on developing EWS and MIG projects Indicative (excluding land and approvals) margins in EWS and LIG projects


An EWS unit has to be sold at `0.5 mn and an LIG unit at `0.75 mn. Given the

scarcity of available land, the buildings should be taller, which entails higher construction

costs (see Exhibit 27), more than the realizable value. Even if FAR/FSI for affordable

housing projects are higher it involves construction of high-rises. Such structures render a

project unviable for private-sector developers.

EWS LIG

Area (sq. ft) 300-500 600-700

Only construction

Cost (Rs/sq. ft) 900-1000 1000-1200

Cost (Rs mn) 0.3-0.5 0.6-0.84

Sale value (Rs mn) 0.15-0.5 0.5-1.5

Value over construction cost Negative Negative to Rs0.7 mn

Post land and approval cost Negative Negative to marginal profit

Unavailability of

land/cheap land are

the biggest hurdles

on the supply side

for construction of

affordable housing



Exhibit 27: The higher you go, the higher the costs Constructions costs for various floors (`/sq. ft)


Resolving legal issues of large infrastructure projects. We believe litigation in

infrastructure/housing/slum projects along with the lack of political will to complete such

projects are major barriers for the development of affordable housing and attracting

more private participation. About 330 infrastructure projects, with investment totaling

`16 tn, are stalled by legal wrangling. Further, many large projects in which private

developers have invested are stuck mainly due to a lack of political will. For instance, the

two largest slum rehabilitation projects in Mumbai have not moved since the 1990s and

2010 respectively; these projects could house over 225,000 EWS families.

Exhibit 28: Rehabilitation projects that are stuck Status of select slum rehabilitation projects, as on December 2014

Source: Companies, Kotak Institutional Equities

Coordination between Center and states. Providing housing for all is a national and

state agenda. But land is a state subject and coordination is required between the Center

and a state for its development. Political differences between the two can hinder the

movement of large public-welfare projects.

Ground + 'X' floors 4' 7' 11' 15' 21'

RCC+Brick+Masonary+Plaster 450 500 600 650 850

Waterproofing 15 15 20 20 20

Doors, Frames and Shutters 40 40 40 40 40

Aluminium window 25 25 25 25 25

Railing 15 15 15 15 15

Flooring 30 30 30 30 30

External lobby and staircase 50 50 50 50 50

Kitchen otta 60 60 60 60 60

Painting (External/Internal) 50 50 50 50 50

Plumbing / sanitation 50 50 50 50 50

Electrical work 45 45 45 45 45

Pipe gas system 10 10 10 10 10

Llift — 40 40 50 50

Fire fighting 7 7 10 10 10

Architect fees 25 25 25 25 25

Liasoning, consultants, height, EC, Wind 100 100 100 100 100

Total (but only building costs) 972 1,062 1,170 1,230 1,430

Development and infrastructure costs

Development work 80 80 80 80 80

Site running 20 20 20 20 20

Engineering staff 50 50 50 50 50

Club house, swimming pool — — — — —

Miscellaneous supervision

Interest costs

Floors

Other and above the regular costs

Based on the debt funding taken on the project

Projects Started Status

MIAL, Mumbai Allotted in 2007 Phase 1 houses constructed, case in court

Dhavari, Mumbai In talks since the 1990s Flip-flop in government policies, no progress

Tehkhand, Delhi Allotted in 2006 Canceled

About 330

infrastructure projects

with investments of

`16 tn are stalled.



The government’s policy decisions. Government policies have changed several times.

For instance, in Mumbai, the rehabilitation policy for slums has undergone multiple

iterations since 1954. The government constructed about 170,000 homes and 340,000

homes are under construction. Still, out of a population of 18 mn in the Mumbai

Metropolitan Region, 60% live in slums.

Exhibit 29: Over time, policies have been changing, but people residing in slums have been increasing Policy decisions aimed at making Mumbai slum free


HFCs face challenges in lending to the low end of the market

Banks, HFCs and financial institutions have been reluctant to lend to the EWS segment. We

believe this is mainly due to (a) the low credit worthiness of such segments and (b) better

lending options elsewhere. We believe HFCs find it challenging to focus on the lowest end

of the market (loans below `0.1 mn)—the business models of housing finance

companies/NBFCs are not yet conditioned to offer high-tenure loans to these segments.

Among HFCs, Mahindra Housing Finance (loan book of `13.5 bn in March 2014) is the rare

exception that focuses on the lowest end of the market (ticket size: `0.1-0.15 mn).

Long-tenure housing loans. NBFCs have set up mechanisms to cater to demand of the

unbanked. But the loan tenure typically reduces down the value chain (see Exhibit 30).

Long-tenure products (5-20 years). Like home loans and loans against property, such

products are typically offered to the mid- and high-end of the market.

Auto/CV loans. They typically have tenures of 3-5 years and are offered to mid-income

groups. In case of CV and MUV loans, offered by NBFCs, borrowers may have access to

banks though they may not have strong banking habits—most transactions maybe cash.

1954BMC Act Section 34A

1956GoI clearance for slum clearance plan

1970Slum improvement program started

1985First World Bank funded project commences

2008Changes in slum regulations:

Rehabilitation area increased to 269 sq. ft, FSI 3-4, 25% premium for land

1980Use of TDR started in Mumbai

1976First census of slums, identity cards issued

1991SRD formed

FSI 2.5, unit size, 180 sq. ft, 25% profit ceiling, one-third payment by slums

1995SRA formed for free houses to slums

Surplus to be given as TDR, carpet area 225, 1:0:0.75 free sale

2014Cut-off dates for eligible slum dwellers

increased from 1995 to 2000



Exhibit 30: Short-term tenure and high-yield loans at the low end of the market Profile of loans across various economic segments offered by NBFCs


Microfinance and gold-loan companies cater to the lowest end of the market. This

segment is largely unbanked. The earnings volatility in this segment is high as such gold

loans and micro-finance loans have a short duration of 6-12 months. Lenders don’t have

the confidence to offer long-tenure loans to this segment even as several MFI borrowers

have completed multiple loan cycles.

Hence, we believe the NBFC sector has not yet evolved to offering long-tenure loans to

the lowest end of the market. As such, demand at the lowest end (housing for the EWS

for loans below `1 mn) will likely be unmet.

High cost of credit delivery. In the absence of formal income documents, NBFCs rely on

local knowledge for lending, leading to higher cost of credit delivery. The joint-liability

models (followed by MFIs) have not been extended to long-tenure loans. Exhibit 31

shows a 5% increase in interest rates on housing loans increases EMIs by 20-30%.

Exhibit 31: EMI increases by20-30% if interest rates increase by 10-15% EMI for home loans of various maturities and interest rates


Absence of a resale market. HFCs have access to the SARFAESI Act, which helps them

to repossess and auction the underlying property. However, there is limited demand for

housing properties in rural India. It may be challenging to recover the loan even as the

security may be assigned in favor of the lender. Industry sources however highlight that a

security assigned to a bank acts as a deterrent to default on a loan. The social pressure in

rural India is strong and borrowers face the risk of being ostracized on being declared a

defaulter.

Segment EWS LMI MI-HMI

Tenure 6 month - 1 year 1 year - 5 years 5 years - 20 years

Products Gold loans Auto loans Housing loans

Microfinance Loan against property Loan against property

Small ticket personal loans Personal loans

Yield 16-25% 11-20% 10-11%; 14-16% for LAP

Ticket size Rs5000-50000 Rs0.3-1 mn Rs1-10 mn

Rs1-10 mn for LAP Rs4-20 mn for LAP

10% 12% 15%

10 years 1,322 1,435 1,613

15 years 1,075 1,200 1,400



INCENTIVIZING THE PRIVATE SECTOR IS THE BEST WAY FORWARD

We believe incentivizing private players will be crucial if the government wants to achieve its housing-for-all

target. Providing higher FAR at lucrative locations, improving approval processes, changing development

plans of large cities and reducing taxes may be ways to achieve the target. We believe empowering banks to

certify income may improve uptake in subsidy schemes.

Compulsion and perks to drive housing stock creation

We believe incentivizing the private sector is the best way to make it participate in

construction of homes in the EWS and LIG segments. While certain state governments have

been incentivizing developers for construction, others have laid rules that compel

construction of such homes (see Exhibit 32).

Exhibit 32: Major states with EWS and LIG construction policies Regulation in select states on EWS and LIG homes


Higher FAR/FSI at existing locations. Providing higher FAR/FSI at existing locations and

using incremental FSI for the EWS section is the best way to overcome the shortage in

EWS homes. Incremental FSI to developers in major metros improves their revenues as

realizations are higher. Along with an increase in FAR, density norms should also change to

accommodate more people. This, we believe, will increase participation by private

developers.

Exhibit 33: Higher FARs in area with over `5,500/sq. ft of selling price will create more EWS stock Additional FAR/FSI example assumed for Gurgaon


As explained in the example above, an increase in density (smaller flats, more units) and

increase in FAR for constructing more EWS units may help to create 12X additional units in

urban centers. This will also require easing of the ground coverage norms. Such rules may

be applicable to all locations where realizations are above `5,500/sq. foot and land area of

the project is five acres or more.

State Proejct type Norm (Rs/unit) Remark

10% of the housing units should be EWS 3,50,000

10% of the housing units should be LIG 700000

Noida, Greater Noida

(Uttar Pradesh)Group Housing

Plotted colonies 20% of the plots for EWS NPNL Minimum size of 50 sq. m.

Group Housing 15% of the housing units should be EWS 1,50,000 Compulsory for all projects; 200 sq. ft per unit

10% of the main dwelling units for domestic help NA Compulsory for all projects; 140 sq. ft per unit

Tamil Nadu All projects 10% of all projects should be EWS NA Area of the units is lower, developer can sell at market price

Large projects 20% of the BUA or 33% of units NA Recent notification and then changes, yet to be implemented

MHADA 20% of units for EWS/LIG/MIG NA Approval and society issues, policy issues of Government

MMRDA Rental housing scheme and increment FSI800-

1,500/monthYet to kick off in a big way

Lately, Government has changed the norms. Developers get

compensatory FAR for constructing this.

As most land is allotment by the Government, there is nothing specific as Government constructs EWS and LIG seperately

Mumbai (Maharashtra)

Haryana (Gurgaon)

Uttar Pradesh Township

Existing

Land (acres) 10

FAR (x) 1.75 2.00 0.75

BUA (sq. ft) 762,300 871,200 326,700

Units (nos.) 390 581 —

EWS (nos.) 58 87 653

Revenue (Rs mn) 4,193 4,792 —

Cost (Rs mn) (1,906) (2,178) (588)

Unit size (sq. ft) 1,900 1,500 500

Gross margins (excl. land) (%) 55 42

10

Proposed

Higher FAR could be

planned for all areas

selling above

`5,500/sq. ft



Gurgaon has over 18,000 acres of land licensed for development and we assume around

6,500 acres is under development. If the same amount of land were to be developed over

the next 10 years, an additional 300,000 EWS units could be constructed in Gurgaon alone.

Centre may introduce cross-state subsidies. Excluding select major cities like Mumbai,

Kolkata, Pune and Chennai most other states (65% of the shortage), have no major

participation of private developers. We believe with a strong (absolute majority)

government in the Center, it can introduce schemes in which developers constructing

homes in a particular state may get FSI benefits in another state. For instance, Bihar has a

shortage of 1.2 mn homes and no presence of a large private developer. The Center may

grant incremental FSI in Gurgaon, Noida, Delhi, Mumbai or other places, so developers

may get higher realizations through FSI incentives for constructing homes in Bihar.

This will require strong and unique coordination between the Center and states. Land

is a state subject and regulations are governed by state governments/local municipal

bodies. A strong political will would be needed to achieve this.

Releasing more government land. Government and its various departments have large

unused land in city centers and near commercial and industrial establishments. A timely

review and implementation of master plans is crucial to release the land.

Steps to augment land supply. (a) Release more non-use government land for

development of affordable housing; (b) convert land in city outskirts, though this will

require improving infrastructure and connectivity to service and industrial clusters;

(c) make it compulsory for new development projects to have several EWS units

(Haryana and Maharashtra have it); (d) relax density norms and provide more FSI for

such developments and (e) introduce rental housing schemes with FSI incentives.

Introduction of tax incentives for developers. The Central Government could offer tax

benefits (for instance under section 80 I(B), which were available for projects cleared until

2008). Also, the government could exempt from tax profits made from the incremental

FSI sold, which was availed by constructing EWS units. Real estate developers/projects

have taxes of 35-42%, which is steep.

Exhibit 34: Taxation should be relaxed Taxed on developers and buyers buying land and homes


Approvals. Developers have been demanding single-window clearance for affordable

housing projects. Although a state subject, we don’t see approvals as a hurdle for

development of affordable housing projects. Developer bodies are pushing to increase

the exemption for EC for affordable housing projects from 20,000 sq. m to 50,000 sq. m.

Although this move will give direct clearances to a large number of projects, it will also

increase illegal construction as the market is still largely unorganized, we believe.

Integrated townships. The concept of integrated townships was introduced to

decongest cities and build smart communities for a healthier lifestyle. Maharashtra has a

comprehensive township policy under which projects are being developed on the

outskirts of Mumbai and Pune. The state government has relaxed stamp duty by 50% for

Sale of units to buyers: stamp duty 5-7%

Sale of units to buyers: service tax 3.09%

Sale of units to buyers: VAT 1%

Sale of units to buyers: registration 1%

Developers purchasing land: stamp duty 5-7%

VAT to contractor 4%

Construction-related service tax 2.60%

Excise and customs duty 15%



units sold in townships. The government is also contemplating increasing FSI for more

development. Townships work like mini cities. Increasing the EWS/LIG component in the

incremental FSI would provide housing and opportunities for work for the larger

community.

Empowering banks to certify income can lift off-take of the 5% subsidy scheme

We believe poor off-take of the Rajiv Rinn Yojana (5% annual interest subsidy for loans up

to `0.8 mn), primarily in the EWS segment, may be due to (1) housing in the low-end of the

market being mainly in the unbanked segment; there is limited finance penetration of housing

loans in this segment and (2) the procedure for certifying the borrower in EWS or LIG

categories being challenging in the absence of income certificates. Income certification is

required from government bodies, which slows the process. Banks have requested the

regulator to empower them to issue such certificates.

The government also assigned urban local bodies and local nodal agencies to identify

potential borrowers and assist them in the requisite paperwork and loan procedures.



DEVELOPERS WILL HAVE TO FAVOR VOLUMES OVER PRICING FOR GROWTH

We expect the middle income group (MIG) and more affluent segments to grow over the next decade, and

the EWS section to decline. We estimate around 5 mn units will be required in the MIG and high income

group (HIG) segments over the next 10 years. Almost all organized developers have focused on this segment

and grown by entering new markets. But with more players entering the real estate industry, we believe

pricing pressure will increase, unlike in the past. Developers, driven by volumes, will perform better.

Urban MIG households to do better as we grow

We expect the middle-income group (MIG) and the high income group (HIG) segments to

grow manifold over the next decade as developers continue to cater to the segment. We

estimate over 5 mn units will be required in the segments over the next decade. As seen

with the performance in the past two decades, with growth of the economy, more

households have emerged in the MIG segment. As profitability remains good in this

segment, developers have concentrated here.

Exhibit 35: We expect households classified as MIG to increase and the EWS segment to drop over the next decade Classification of urban households, calendar year-ends, 2014-25E (mn units)


MIG and HIG markets have grown over the past few years

With expanding commercial and industrial segments, all major metros have seen more

launches and absorption of housing units over the past few years. Our evaluation of

business models and area offered for sale, by listed developers, shows none of the larger

developers caters to the EWS and LIG segments. In places where such projects are being

constructed it is either because of a regulatory norm of a state or an avenue for developers

to acquire land. Issues such as scarcity of land, land cost and the lack of credit availability to

buyers prevent developers from construct such homes.

Exhibit 36: Regulations force developers to construct EWS and LIG Rules in select cities/states where listed developers operate


2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

MIG and above 4.1 4.5 5.0 5.5 6.0 6.5 7.1 7.7 8.3 8.9 9.6 10.4

LIG 17.8 20.8 23.8 26.9 30.3 34.8 39.2 43.7 48.9 54.2 59.6 65.1

EWS 69.1 69.3 69.5 69.7 69.5 68.5 67.5 66.5 65.0 63.3 61.6 60.0

Total 91.0 94.6 98.3 102.0 105.8 109.7 113.8 117.9 122.1 126.4 130.9 135.4

State Proejct Norm (Rs/unit) Remark

10% of the housing units should be EWS 350,000

10% of the housing units should be LIG 700,000

Noida, Greater Noida

(Uttar Pradesh)Group housing

Plotted colonies 20% of the plots for EWS NPNL Minimum size of 50 sq. meters

Group housing 15% of the housing units should be EWS 150,000 Compulsory for all projects; 200 sq. ft per unit

10% of the main dwelling units for

domestic helpNA Compulsory for all projects; 140 sq. ft per unit

Tamil Nadu All projects 10% of all projects should be EWS NA Area of the units is lower, developer can sell at market price

Large projects 20% of the BUA or 33% of units NA Recent notification and then changes, yet to be implemented

MHADA 60% of units for EWS/LIG/MIG NA Approval and society issues, policy issues of government

MMRDA Rental housing scheme, increased FSI800-

1,500/monthYet to take off

Mumbai (Maharashtra)

Uttar Pradesh TownshipLately the government has changed the norms. Developers

get compensatory FAR for constructing this

As most land is allotted by the government, there is nothing specific as government constructs EWS and LIG units

separately

Haryana (Gurgaon)



Some large listed developers launch units in the affordable housing segment

In Bangalore, Puravankara is the only large developer that has created a separate brand

for its affordable housing venture, Provident Housing. Provident Housing concentrates on

projects in most South Indian cities. Brigade also ventured into the segment through its

Brigade Value Homes in FY2011, but has not expanded its portfolio since.

Exhibit 37: Provident launched cheap homes but now prices are beyond the reach of the LIG segment Provident housing projects, prices at launch and as on September 2014


Most Provident product prices increased 60-80%, resulting in slowing sales and

Brigade has restricted Value Homes to its initial set of launches.

In Mumbai and the MMR, HDIL caters to the affordable housing segment. Its

primary form of acquiring land in Mumbai is through the SRS route, while in the MMR

region (Vasai, Virar and Palghar) it launched homes of the ticket size of `2-3 mn. DB

Realty and Hubtown also place their business models around redevelopment, SRS and PPP

models. But these developers have company-specific issues impacting their operations.

Among developers in the MMR, HDIL has the largest offering in the affordable housing

segment and with its low land cost it is a profitable business for HDIL.

In North India, Ansal Properties and Ashiana Housing have affordable housing projects in

tier-2 and tier-3 towns. DLF and Unitech’s contribution to affordable housing is restricted

to the mandatory construction to abide by the regulations of the state. Even after the

issues of a separate affordable housing policy in 2013 by the Haryana Government, DLF

and Unitech have not ventured into that segment.

Exhibit 38: HDIL and Puravankara focus on affordable housing Developers - presence in the affordable housing segment


Exhibit 39: HDIL and Puravankara focus on affordable housing Developers - contribution from affordable housing, March 2016E


Launch Launch BSP (a) Current BSP Increase

Project City (Date) (Rs/sq. ft) (Rs/sq. ft) (%)

Welworth City Bangalore April, 2009 1,873 3,215 72

Cosmo City Chennai July, 2009 1,758 3,295 87

Sunworth Bangalore December, 2012 2,932 3,790 29

Notes:

(a) BSP - Base selling price. Floor rise, premiums incremental.

Developer Presence in the affordable housing segment

DLF No presence in LIG segment

Unitech Unihomes launched in FY2011, yet to start delivery, no new launches

LIG homes in tier-2 towns in North India

Delivering 22,000 EWS units in UP over the next four years

Around 25% of sales from LIG units

Ashiana Housing Affordable housing in tier-2 and tier-3 cities

Oberoi No presence in the LIG segment

GPL Minimal presence in Ahmedabad

HDIL LIG homes in MMR, largest listed developer in the segment

Presence in the form of SRS and redevelopment

Delivered more SRS units than any other developer in the past four years

MLIFE Two pilot projects in Chennai and MMR, one launched

Sobha No presence in the LIG segment

Prestige Estates No presence in the LIG segment

Puravankara Provident brand caters to the LIG segment

Brigade Launched Brigade Value Homes in FY2009, no addition since

APIL

DB Realty

Contribution from sub

Rs3 mn homes

(%) Rating

APIL 60 20 NR

Ashiana Housing NA NA NR

DLF 210 — BUY

Brigade NA NA NR

GPL 225 2 REDUCE

HDIL 130 25 RS

MLIFE NA NA NR

Oberoi 325 — BUY

Prestige Estates 240 — REDUCE

Puravankara 125 17 NR

Sobha 525 — ADD

Sunteck 410 — ADD

Unitech 24 2 NR

Developer

NAV

(Rs/share)



Most developers launched low-ticket projects, but in certain locations, prices rose 40-50%

since the launches and developers subsequently moved out of the `3 mn/unit market.

Exhibit 40: Projects had earlier been launched at a low price Select projects of listed developers in affordable housing (at or below `3 mn/unit size)


Developers have grown, but with a different strategy

Most organized developers grew over 2007-09. But they followed different approaches.

Developers grew with (a) a presence in expanding markets (Bangalore, Pune, Chennai,

Gurgaon), (b) expansion into different non-competing markets of a city, (c) expansion into

different cities and (d) concentration on a particular sub-segment (similar sales, higher

value).

Exhibit 41: Gaining market share in the same city Presence in several segments of a city, March fiscal year-ends, 2009-16E (units)


Exhibit 42: Expansion into multiple cities helps Presence in several cities, March fiscal year-ends, 2009-16E (units)


Launch

Developer City (date) Status

APIL Jaipur Sep-11 1,000 1.8 1,200 Sold & near completion

Ashiana Jaipur Oct-07 1,660 2.0 2,300 Under construction

Ashiana Bhiwandi Apr-11 1,980 2.5 2,200 Sold

Ashiana Halol (Gujarat) 1,620 1.8 1,710 Available & u/c

Brigade Bangalore Jun-09 2,390 2.0 3,700 Available & u/c

HDIL Palghar (Thane) Dec-10 1,915 2.7 2,751 Available & u/c

HDIL Palghar (Thane) Nov-10 1,910 1.1 2,300 Sold & u/c

MLIFE Chennai Dec-13 2,800 2.3 2,800 Available & u/c

Provident Bangalore Jul-09 1,950 1.8 3,000 Completed & available

Unihomes Bhopal Jun-13 2,210 1.8 2,210 Available & u/c

Unihomes Chennai Aug-09 2,150 2.5 3,500 Available & u/c

Unihomes Mohali Apr-09 1,975 2.2 2,010 Sold & u/c

Unihomes Noida Jun-09 2,895 2.6 3,000 Sold & u/c

Current

price

(Rs/sq. ft)

Ticket price at

launch

(Rs mn)

Launch

price

(Rs/sq. ft)

2009 2010 2011 2012 2013 2014 2015E 2016E

Sobha 7 6 7 8 10 12 15 16

Prestige 3 3 3 5 9 10 14 16

Puravankara 4 4 5 5 8 9 11 12

Oberoi 3 3 2 2 1 2 3 4

Godrej — — — 1 2 3 4 4

HDIL 2 5 6 6 6 6 6 7

Sunteck 1 2 1 2 2 3 3 2

Mahindra 2 2 1 1 — — 2 3

DLF 2 2 2 2 1 2 3 3

Unitech 3 3 3 3 3 3 3 3

Notes:

(a) Micro-markets considered as per company head-offices

Bangalore: Prestige, Sobha, Puravankara; Mumbai: Godrej, HDIL, Oberoi,

Mahindra Lifespaces and Sunteck

NCR: DLF & Unitech. For Unitech - considered only Gurgaon

2009 2010 2011 2012 2013 2014 2015E 2016E

Sobha 4 4 4 7 7 9 10 11

Prestige 2 2 3 4 5 5 6 7

Puravankara 3 3 3 4 5 5 5 6

Oberoi 1 1 1 1 1 1 1 1

Godrej 4 5 7 7 10 11 13 13

HDIL 2 2 2 2 2 3 2 2

Sunteck 2 2 2 2 3 3 3 1

Mahindra 3 3 3 2 4 6 8 8

DLF 7 8 9 11 11 11 11 11

Unitech 5 8 10 12 12 12 13 13

Notes:

(a) Micro-markets considered as per company head-offices

Bangalore: Prestige, Sobha, Puravankara; Mumbai: Godrej, HDIL, Oberoi,

Mahindra Lifespaces and Sunteck

NCR: DLF & Unitech. For Unitech - considered only Gurgaon



Exhibit 43: Bangalore developers gained market share, thanks to Prestige Sales: market, select developers in that market, March fiscal year-ends, 2009-15 (YTD) (mn sq. ft)

Source: Companies, Prop Equity, Kotak Institutional Equities

Larger developers took price increases and product upgrades, resulting in volumes slowing.

But volumes increased for developers that did not take price increases or expanded rapidly.

Exhibit 44: Increase in prices and higher product sizes led to lower volumes Price (`/sq. ft) and volumes (mn sq. ft), March fiscal year-ends, 2009-15 (YTD)


2009 2010 2011 2012 2013 2014 1HFY15

Bangalore 37.9 35.7 49.9 70.0 92.2 88.2 43.9

Prestige, Sobha, Puravankara 1.3 4.8 7.0 8.6 11.9 15.6 10.4

(%) share 3.3 13.5 14.0 12.3 12.9 17.7 23.6

Gurgaon 27.8 43.9 54.4 52.6 53.0 23.7 7.4

DLF and Unitech 6.0 8.5 8.2 5.5 3.7 2.5 0.5

(%) share 21.4 19.3 15.1 10.4 7.0 10.7 6.8

Pune 37.0 44.1 55.7 57.9 60.1 48.7 21.3

KPDL NA NA NA 2.9 2.7 2.1 1.2

(%) share NA NA NA 4.9 4.4 4.4 5.7

Selling price (Rs/sq. ft) 2009 2010 2011 2012 2013 2014 1HFY15

Bangalore

Prestige 6,184 5,860 7,465 4,302 5,212 5,920 6,124

Sobha 2,965 2,647 4,082 5,181 5,897 6,535 6,553

Puravankara NA 3,082 3,286 3,950 4,345 4,908 4,935

Provident NA 1,977 2,023 2,679 2,965 3,429 3,450

Brigade NA NA NA 4,302 4,208 5,120 5,113

Mumbai

GPL (b) NA 3,078 3,351 6,460 7,071 8,221 6,841

Oberoi (c) NA NA 9,261 12,363 15,631 15,360 21,921

Sunteck (a) NA NA NA 12,884 20,665 19,673 22,187

MLIFE NA NA 4,931 9,558 3,912 4,314 4,200

NCR

DLF 2,598 5,866 6,489 3,887 5,306 10,873 12,315

Unitech NA NA 4,734 5,304 5,132 6,451 5,802

Ashiana NA 2,070 2,055 2,190 2,699 2,926

Pune

KPDL NA NA NA NA 5,833 5,351 5,679

Sales (mn sq. ft) 2009 2010 2011 2012 2013 2014 1HFY15

Bangalore

Prestige 1.3 0.9 1.9 4.9 6.0 6.1 4.2

Sobha 0.9 2.1 2.8 3.3 3.8 3.6 1.6

Puravankara NA 0.9 1.7 1.7 2.1 2.5

Provident NA 1.7 1.2 0.7 1.8 1.1 1.3

Brigade NA NA NA 1.6 1.9 2.6 1.3

Mumbai

GPL (b) NA 1.4 2.4 2.6 4.1 3.0 2.5

Oberoi (c) NA NA 0.7 0.7 0.5 0.3 0.1

Sunteck (a) NA 0.4 0.3 0.3 0.3 0.2 0.1

MLIFE 0.4 1.2 1.4 1.2 1.1 0.9 0.4

NCR

DLF 7.6 12.2 10.3 13.6 7.2 3.8 1.0

Unitech NA NA 9.1 7.2 5.5 2.3 0.9

Ashiana — 0.7 1.4 1.8 1.9 2.2

Pune

KPDL NA NA NA NA 0.5 2.1 1.2

Notes:

(a) Cummulative till March 2010.

(b) including area sold under DM model till FY2013, GPL share for 2014.

(c) Total sales including JV partner share.



A low-entry barrier business, more developers, dynamics will change

In the past seven years, over 80% of the stock launched has been absorbed across India’s 40

cities. The top seven metros have seen over 90% of absorption from the area offered for

sale. Over 90% of the area sold in the top seven metros was priced at over `3 mn. The MIG

and HIG segments performed well for developers in the top seven metros.

Exhibit 45: Over 24 mn sq. ft were sold in the past seven years, 80% of the launched area absorbed Supply and absorption of residential flats, calendar year-ends, 2008-14


Real estate is a low-entry barrier business. With expanding services, commercial and

industrial segments, and more urbanization the number of developers has increased in all

major metros. The developer count has increased by 60-200% in all cities, but Hyderabad.

More developers will result in more projects. Also, the existing developers have grown in

scale of operations. Most existing larger developers now have more projects and projects

with high saleable units to offer.

Exhibit 46: Low entry barriers result in more developers Developers’ projects, March fiscal year-ends, 2009-13 (units)


Exhibit 47: More developers, more projects Projects for sale, March fiscal year-ends, 2009-13 (units)


Hence, we believe even organized developers would need to get the pricing and products

right to grow faster. We believe that in high priced markets, like Mumbai, where supply is a

constraint, as more projects being launched, most super-luxury projects will be sold for a

few quarters after construction. Bangalore and Pune have seen unlimited supply and hence

never seen pricing power in the MIG and LIG segment. We evaluate the development

business of developers under our coverage.

2008 2009 2010 2011 2012 2013 2014

(mn sq. ft)

Supply 368 366 817 849 813 755 259

Absorption 382 381 614 670 661 602 249

(units)

Supply 257,325 291,954 596,146 617,838 610,010 586,208 193,989

Absorption 254,759 282,207 449,832 485,091 486,522 460,617 193,864

Notes:

(a) 2014 as on July 30, 2014

2009 2010 2011 2012 2013

Bangalore 316 293 328 435 517

Pune 361 364 423 475 517

Chennai 132 155 237 307 335

Hyderabad 303 286 334 340 331

Gurgaon 53 55 67 88 94

Noida 13 34 47 55 58

Mumbai 204 226 314 315 308

Thane 227 331 471 517 585

Kolkata 75 82 129 181 227

Notes:

(a) Doesn’t include all developers in a city.

2009 2010 2011 2012 2013

Bangalore 603 526 623 849 1,061

Pune 701 648 750 907 978

Chennai 453 433 497 503 501

Hyderabad 228 251 446 576 616

Gurgaon 113 108 134 181 219

Noida 32 72 107 138 151

Mumbai 421 412 564 583 619

Thane 382 497 750 829 929

Kolkata 174 169 249 344 442

Notes:

(a) Doesn’t include all developers in a city.



STRONG LATENT DEMAND IN LIG, MIG SEGMENTS TO DRIVE HOUSING LOAN GROWTH

We expect housing loans in India to post 19% CAGR over FY2014-22 to `35 tn. Most of the demand will be

driven by loans in the LIG (`1-2.5 mn), MIG and above segments (loans over `2.5 mn). Tax incentives and

interest subvention provided by the government will continue to boost housing-loan demand. Demand for

loans in the lowest segment, the EWS, is likely to be unmet unless HFCs modify their lending models and

implementation of the incentive schemes becomes more effective. HFCs are evidently moving to the low end

of the market driven by stiff competition in large markets and large latent demand in the segment.

High growth in housing loans

The government’s emphasis on housing and large latent demand will drive strong growth in

housing finance. We expect the housing loan book to grow by 19% CAGR over FY2014-22;

outstanding housing loans are likely to increase to `35 tn in FY2022 from `8.7 tn in

FY2014. Housing loans posted 20% CAGR over FY2004-14.

Exhibit 48: We expect outstanding home loans in India to grow to `35 tn by 2022 Outstanding home loan book, March fiscal year-ends, 2011-22E (` tn)

Source: NHB, RBI, Kotak Institutional Equities estimates

Mortgage-to-GDP ratio will increase to 13%

We expect the mortgage-to-GDP ratio to increase to 13% in FY2022 from 8% currently,

based on these forecasts. The ratio would be lower than in most other developing countries

in Asia and developed countries (see Exhibits 49 and 50).

5 68

910

1214

17

20

24

29

35

0

8

16

24

32

40

20

11

20

12

20

13

20

14

20

15

E

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

20

21

E

20

22

E



Exhibit 49: India has a low mortgage-to-GDP ratio Mortgage-to-GDP ratio, March fiscal year-end, 2014 (%)

Source: HDFC, European Mortgage Federation, Hofinet, Kotak

Institutional Equities

Exhibit 50: Mortgage-to-GDP ratio will rise to 13% by FY2022E Mortgage to GDP ratio, March fiscal year-end, 2004-2022E (%)

Source: HDFC, European Mortgage Federation, Hofinet, Kotak

Institutional Equities estimates

20% CAGR growth in housing-loan disbursements until FY2022E

We forecast 20% CAGR growth in disbursement in housing loans over FY2014-22, which

will drive the aggregate loan book to `35 tn. We have assumed a 17% repayment rate in

our forecasts.

LIG and MIG will be main drivers. The low income (LIG) segment, or those who draw

loans of `1-2.5 mn, will be the main driver of disbursements, growing at 27% CAGR over

FY2014-22E. The MIG segment (loans over `2.5 mn) is likely to grow at 19% CAGR. We

don’t think HFCs and banks will be able to cater to the low end of the market (the EWS

segment draws loans of less than `1 mn) as the lending models of HFCs are not conditioned

to lend to this segment.

Large LIG demand. We consider housing demand of `56 tn in the low income group (LIG)

to drive loan disbursements in the low-income segment. We assume 50% LTV ratio and

80% credit penetration, translating into aggregate disbursements of `23 tn over FY2014-22

in this segment.

MIG demand strong, but easing. We consider the demand of `40 tn in the middle- and

high-income segments to drive disbursements in this segment. We assume 65% LTV ratio

and 85% credit penetration, translating into aggregate disbursements of `22 tn over

FY2014-22 in these segments.

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20

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20

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20

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Exhibit 51: We expect average loan demand of `45 tn from the LIG and MIG segments Calculation of aggregate demand for housing loans


Exhibit 52: High disbursement growth in the LIG and MIG segments Disbursement of housing loans, March fiscal year-ends, 2014-22E (` tn)


High disbursement growth in recent years…

We estimate housing-loan disbursements of `2.6 tn in FY2014, or 18% CAGR over FY2011-

14. Exhibit 53 shows disbursements reported by public banks and HFCs. We have extended

disbursement trends reported by public banks and HFCs to private banks. According to NHB,

housing-loan disbursements by HFCs increased by 23% CAGR over FY2006-13 and by 28%

over FY2010-13. The repayment rate of HFCs was 11-17% over FY2010-13.

Achievement by 2022

2012 KIE (I) KIE (II) GOI

Units required (mn)

EWS 11 32 36 45

LIG 7 33 38 50

MIG and above 1 4 5 5

Total 19 68 79 100

Value of units (Rs tn)

EWS 5 24 27 34

LIG 7 50 56 75

MIG and above 41 29 40 40

Total 54 103 123 149

LTV (%)

EWS 40 40 40

LIG 50 50 50

MIG and above 65 65 65

Credit penetration (%)

EWS 40 40 40

LIG 80 80 80


Aggregate loan demand (Rs tn)

EWS 4 4 5

LIG 20 23 30


Total 40 49 58

Notes:



2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Total

Disbursements (Rs tn)

EWS (loans < Rs1 mn) 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.4 0.4 4.1

LIG (loans between Rs1-2.5 mn) 0.8 1.0 1.3 1.6 2.1 2.8 3.6 4.7 5.8 23.0

MIG and above (loans > Rs2.5 mn) 1.2 1.4 1.7 2.0 2.3 2.8 3.3 4.0 4.8 22.3

Total disbursements 2.6 3.1 3.6 4.2 5.0 6.0 7.4 9.1 11.0 49.4

YoY (%)

EWS (loans < Rs1 mn) 5 (5) (5) (5) (5) (5) (5) (5)

LIG (loans between Rs1-2.5 mn) 25 25 25 30 30 30 30 25

MIG and above (loans > Rs2.5 mn) 18 18 18 18 18 20 20 20



Exhibit 53: HFCs reported 28% growth in disbursements over FY2010-13 Disbursement of housing loans, March fiscal year-ends, FY2006, 2010-13 (` bn)


Exhibit 54: Housing loan repayment has been 11-17% over FY2007-13 Loan book, disbursements and repayment of housing loan for HFCs, March fiscal year-ends, 2007-13 (` bn)


...but the share of low-end loans declines

Exhibit 55 shows the break-up of disbursements by public banks and HFCs. The share of

disbursements by HFCs to the lowest segment (loans of less than `1 mn) declined to 29% of

the total in FY2013 from 32% in FY2012. For public banks, the absolute quantum of

disbursements to the segment declined to `180 bn in FY2013 from `308 bn in FY2011.

Exhibit 55: Disbursements of loans of less than `1 mn in value are declining Disbursements of public banks and HFCs, March fiscal year-ends, 2011-13


Income levels sufficient to support our housing-finance loan forecasts

We find no constraints on household income to support our housing-loan forecasts. Our

analysis of household income across segments suggests the aggregate of individual

household income in India can support the housing loan book of `46 tn in FY2014

compared to the outstanding loan book `8 tn. This implies 22% mortgage penetration of

the latent income pool. We expect aggregate household income to support the housing

loan book of `173 tn in FY2022 compared to our estimate of `35 tn; thus, the penetration

ratio will remain almost stable at about 20%.

Key assumptions in our calculations

Exhibit 56 shows the break-up of households in urban India across income segments.

We assume typical housing loans to have installment-to-income ratio of 50%, tenure of

15 years and IRR of 10.2-12.5%.

2006 2010 2011 2012 2013

Public banks NA 718 751 738 718

Housing finance companies 247 445 552 682 924

2007 2008 2009 2010 2011 2012 2013

Disbursements 247 312 338 445 552 682 924

Repayments 207 121 162 182 219 324 242

Outstanding loan book 901 1,092 1,268 1,531 1,864 2,222 2,904

Repayment rate (%) 24 13 15 14 14 17 11

Notes:

Repayment rate = Opening loan book + disbursements - closing loan book.

Repayment rate = Repayment/ opening loan book.

Public sector banks Housing finance companies

2011 2012 2013 2012 2013

(Rs bn) (% of total) (Rs bn) (% of total) (Rs bn) (% of total) (Rs bn) (% of total) (Rs bn) (% of total)

Loan < Rs1 mn 308 41 229 31 180 25 218 32 268 29

Loans between Rs1-2.5 mn 203 27 266 36 302 42 171 25 222 24

Loan > Rs2.5 mn 240 32 244 33 237 33 293 43 434 47

Total 751 27 738 36 718 42 682 25 924 24



Exhibit 56: India will see a big uptick in rich households Distribution of urban Indian households by consumption expenditure, March fiscal year-ends, 2012-25E (units, mn)


Exhibit 57: Household income can support our home-loan forecast Loan book supported by aggregate household income across segments, March fiscal year-ends, 2012-22E (` tn)


Housing finance a competitive business in the high-end market

Housing finance is a highly competitive business, with thin spreads for lenders. The top-five

players, Axis Bank, ICICI Bank, SBI, HDFC and LICHF dominate with 50-60% market share.

We have excluded the non-retail loan book of large HFCs in this calculation.

Exhibit 58: HFCs have a 40% market share in the housing finance market Outstanding housing finance loans, March fiscal year-ends, 2013-14 (` bn)

Source: Companies, NHB, RBI, Kotak Institutional Equities estimates

Exhibit 59 shows that the spread between home-loan rates of HDFC and the 10-year AAA

yield were less than 1% for the past few years, though it has expanded in recent months.

Stiff competition from banks (ICICI Bank in the 2000s and SBI in recent times) is the likely

reason for HFCs’ low spreads. Exhibit 60 shows that large players charge almost similar rates

of interest on home loans. Large players have focused mainly on major cities, the key centers

of business for the industry.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Prospering 9 10 12 14 17 20 23 26 31 36 41 48 55 62

Evolving 25 29 33 36 40 44 48 52 54 57 60 61 62 63

Emerging 40 41 42 42 42 38 35 32 28 25 21 17 14 10

Surviving 10 7 5 3 0 — — — — — — — — —

Total 84 88 91 95 98 102 106 110 114 118 122 126 131 135

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Prospering 10.1 12.5 16.7 22.4 28.9 36.3 44.8 55.8 72.2 91.0 112.3

Evolving 12.2 14.9 17.8 20.7 24.1 28.4 33.0 37.6 41.8 46.4 51.6

Emerging 9.2 10.0 10.7 11.3 12.0 11.7 11.3 10.8 10.3 9.5 8.6

Surviving 0.6 0.5 0.3 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total 32 38 46 55 65 76 89 104 124 147 173

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Key public banks

BoB 22 29 34 45 60 73 83 103 125 141 160 196 2.1 1.8 1.7 1.9 2.0 2.0 2.3 2.3 2.3 2.1 2.2

Canara bank 16 29 42 56 66 66 79 101 152 158 131 197 2.1 2.2 2.1 2.1 1.8 1.9 2.2 2.8 2.5 1.8 2.2

PNB 26 32 40 72 97 77 84 106 118 126 143 170 2.3 2.1 2.6 3.0 2.1 2.1 2.3 2.2 2.0 1.9 1.9

SBI 122 171 250 318 380 451 541 712 899 1,027 1,195 1,407 12.2 13.0 11.7 11.8 12.4 13.3 15.7 16.5 16.4 16.0 16.0

Key private banks

Axis bank 1 3 11 27 48 77 104 147 189 282 389 509 0.2 0.6 1.0 1.5 2.1 2.6 3.2 3.5 4.5 5.2 5.8

HDFC bank — — — — — — 51 87 115 143 168 193 — — — — — 1.2 1.9 2.1 2.3 2.2 2.2

ICICI bank 92 166 285 455 639 668 576 475 541 489 579 709 11.9 14.8 16.8 19.9 18.3 14.2 10.5 9.9 7.8 7.7 8.1

Total banks 347 894 1,339 1,852 2,307 2,557 2,794 3,009 3,591 4,034 4,567 5,408 64.1 69.6 68.3 71.9 70.1 68.8 66.3 65.8 64.5 61.1 61.6

Key NBFCs

HDFC (a) 217 280 360 450 565 730 549 613 736 888 1,113 1,333 20.0 18.7 16.6 17.6 20.0 13.5 13.5 13.5 14.2 14.9 15.2

LIC Housing Finance (a) 74 91 117 143 170 206 252 339 467 599 751 886 6.6 6.1 5.3 5.3 5.7 6.2 7.5 8.6 9.6 10.1 10.1

DHFL (a) 9 12 16 23 32 39 58 88 141 255 296 354 0.8 0.8 0.8 1.0 1.1 1.4 1.9 2.6 4.1 4.0 4.0

Indiabulls Housing (a) — — — — — — 63 78 140 195 244 292 — — — — — 1.6 1.7 2.6 3.1 3.3 3.3

Repco Home Finance (a) — — — — — — — — — 24 30 38 — — — — — — — — 0.4 0.4 0.4

All NBFCs listed above 301 383 492 615 767 975 922 1,118 1,485 1,961 2,435 2,903 27.4 25.6 22.7 23.9 26.7 22.7 24.6 27.2 31.3 32.6 33.1

Other NBFCs 128 118 93 246 134 117 346 413 379 261 469 462 8.5 4.8 9.1 4.2 3.2 8.5 9.1 7.0 4.2 6.3 5.3

Total NBFCs 429 501 585 861 901 1,092 1,268 1,531 1,864 2,222 2,904 3,365 35.9 30.4 31.7 28.1 29.9 31.2 33.7 34.2 35.5 38.9 38.4

Total NA 1,395 1,924 2,713 3,208 3,649 4,062 4,540 5,455 6,256 7,471 8,773 100 100 100 100 100 100 100 100 100 100 100

Notes:

(a) HDFC, LICHF, REPCO and Dewan Housing Finance - individual loans only; Indiabulls - mortagage loans.

(b) First Blue Housing Finance merged with Dewan Housing Finance in FY2013, FY2012 numbers reinstated for the merger.

(c) The top-five players are Axis Bank, ICICI Bank, SBI, HDFC and LIC Housing Finance.

Loan book (Rs bn) Market share (%)



Exhibit 59: A low spread between home loan rates and GSec yields HDFC's new home-loan rates, two-year GSec bond yields, December 2003-December 2014 (%)


Exhibit 60: Housing loan rates are very competitive Retail home-loan rates for floating rate loans below `7.5 mn, August 2012-December 2014 (%)


Housing finance sector is moving down the value chain

We believe housing finance companies are gradually moving down the value chain, catering

to low-ticket borrowers. The newer players have developed their business models to focus

on the low- to mid-end of the market with average loan ticket sizes of `1 mn compared to

`2-2.5 mn for large players.

Several new housing finance companies in the past few years…

NHB provided licenses to 16 new housing finance licenses over FY2010-13, taking the

number of HFCs in 2013 to 56. Most of the companies are in the private sector and focus

on the lower end of the market.

Exhibit 61: 16 new HFCs between 2010 and 2013 Number of HFCs licensed by the NHB, March fiscal year-ends, 2008-13 (#)


2

5

8

11

14

17

Dec-

03

Jun-0

4

Dec-

04

Jun-0

5

Dec-

05

Jun-0

6

Dec-

06

Jun-0

7

Dec-

07

Jun-0

8

Dec-

08

Jun-0

9

Dec-

09

Jun-1

0

Dec-

10

Jun-1

1

Dec-

11

Jun-1

2

Dec-

12

Jun-1

3

Dec-

13

Jun-1

4

Dec-

14

(%) HDFC's home loans rates 10 yr AAA yields

Aug-12 Oct-12 Feb-13 Jun-13 Aug-13 Oct-13 Jan-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Dec-14

HDFC 10.75 10.50 10.40 10.40 10.65 10.65 10.25 10.25 10.15 10.15 10.15 10.15 10.15

ICICI Bank 10.75 10.50 10.50 10.40 10.65 10.50 10.25 10.15 10.15 10.15 10.15 10.15 10.15

SBI 10.75 10.15 10.10 10.10 10.10 10.30 10.15 10.15 10.15 10.15 10.15 10.15 10.15

LICHF 10.75 10.50 10.50 10.25 10.25 10.15 10.25 10.15 10.15 10.15 10.15 10.15 10.15

Housing finance companies (#)

New Total

2008 3 43

2009 2 43

2010 8 49

2011 4 53

2012 1 54

2013 3 56



...most of them focus on the mid- to low-end of the market

Most HFCs (after the top 2-3 players) do not operate in the most competitive segment of the

market. The focus is on the low-income segment, which enables them to earn higher yields

(11-13%) and hence sustain a high spread despite their relatively higher cost of borrowing.

The average housing loan ticket size of these players is about `1 mn against `2-2.5 mn for

large players.

Exhibit 62: Lower ticket size for Dewan Housing, Gruh, Mahindra Housing and Repco Ticket size of housing loans, March fiscal year-ends, 2014 (` mn)


Large players are also moving to the low end of the market gradually

A slowdown in large cities (primarily Mumbai and the NCR) and high competition in these

segments has likely prompted large housing finance companies to increase focus on smaller

cities. This is indicated by the moderate increase in average ticket sizes of loans over the last

few years versus a higher rise in real estate prices during the period. Exhibit 63 shows the

average ticket size of HDFC has grown by 9% CAGR over FY2007-14. LICHF reported 13%

CAGR during the period as the company shifted focus on large markets in 2008 after ICICI

Bank slowed down. HDFC and LICHF delivered 6-7% CAGR in average ticket size loans

between FY2011 and FY2014. As per NHB Residex, real estate prices in large cities increased

by 11-20% CAGR over FY2007-14 and 7-18% over FY2011-14.

Exhibit 63: HDFC’s and LICHF's average ticket size grew by 9%

and 13% CAGR Average ticket size of HDFC's loans, March fiscal year-ends, 2007-14 (` mn)


Exhibit 64: Most large cities reported 11-20% rise in real estate

prices NHB Residex, 2007-4QFY14 (%)


1.1

0.7

2.2

2.5

2.0

2.5

0.1

1.0

0.0

0.6

1.2

1.8

2.4

3.0

DHFL GruhFinance

HDFC Indiabulls LICHF PNBHousing

MahindraHousing

Repco

1.2

1.41.5

1.8 1.9

2.2 2.2 2.2

0.8

1.11.2

1.4

1.6

1.81.9

2.0

0.0

0.5

1.0

1.5

2.0

2.5

2007 2008 2009 2010 2011 2012 2013 2014

HDFC LICHF

50

110

170

230

290

350

20

07

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

3Q

FY1

2

4Q

FY1

2

1Q

FY1

3

2Q

FY1

3

3Q

FY1

3

4Q

FY1

3

1Q

FY1

4

2Q

FY1

4

3Q

FY1

4

4Q

FY1

4

Mumbai Bangalore

Delhi Calcutta

Chennai Pune



Liability-side challenges encourage smaller players to focus on the low end

The borrowing cost of small HFCs is generally higher than larger peers. These companies

have a lower credit rating (translating into higher borrowing costs) than large players (HDFC

and LICHF are rated AAA) and hence cannot compete with large players in prime markets.

However, HFCs promoted by large institutions like PNB Housing Finance and Gruh Finance

enjoy the confidence of their lenders due to their parentage and hence their cost of funds is

lower (see Exhibit 65).

Exhibit 65: Lower cost of funding for HDFC, LICHF, Gruh Finance and PNB Housing Finance Cost of borrowings, March fiscal year-ends, 2011-14 (%)


NHB’s refinance facilities to lend to low segment adds incentive to small HFCs

NHB offers refinance facilities to banks and HFCs for lending in the interiors and to the low

end of the market. This has been an added incentive for small HFCs to focus on the low end

of the market. To pass on benefits of the low cost of funds to the borrower, NHB recently

capped spreads on such lines of credit to 2.5%. This will reduce reliance on NHB funds, in

our view.

NHB operates two rural housing schemes, Rural Housing Fund (RHF) and Golden Jubilee

Rural Housing Refinance Scheme (GJRHRS). RHF is contributed by banks under RIDF. About

2% of the aggregate housing finance disbursements are refinanced under RHF. The

refinance rate under RHF is 7.5% and under GJRHS is 8.5%, subject a 2.5% cap on spreads

for HFCs.

GJRHFS has been conceptualized to address the problem of rural housing through

improved access to housing credit, which would enable an individual to build a new

house or improve an existing one. In FY2013 banks and HFCs disbursed about `244 bn

(10% of aggregate disbursements) under this scheme.

NHB also has a low-income housing scheme for the urban poor, under which NHB

provides refinance (up to 150 bps lower than the NHB refinance rate) for loans up to

`1 mn for borrowers that have income of up to `0.2 mn. Disbursements under this

scheme were low at `240 mn in FY2013.

NHB also runs a micro housing refinance program, under which it disbursed `1 bn to 32

MFIs in FY2013.

2011 2012 2013 2014

DHFL 8.2 10.6 12.2 10.6

Gruh Finance 7.4 9.1 9.2 9.5

HDFC 7.1 8.8 9.3 9.3

LIC Housing Finance 7.8 9.1 9.5 9.5

Mahindra Housing Finance 7.5 10.5 11.3 11.6

PNB Housing Finance NA 9.6 8.9 9.3

Repco Home Finance NA 11.4 11.6 10.0



Exhibit 66: RHF drew `40 bn of aggregate housing loan disbursements in FY2013 Disbursements under the Rural Housing Finance (RHF) scheme, March fiscal year-ends, 2011-13


Exhibit 67: GJRHFS drove `244 bn or 10% of home-loan disbursements in FY2013 Performance of GJRHFS, March fiscal year-ends, 2002-13


No compromise on quality of underwriting in low and medium segment. Most HFCs

follow conservative underwriting practices. The loan-to-value (LTV) and installment-to-

income (IIR) ratios of most companies are low—LTV ratio of 50-65% and IIR ratio of 35-

40%. The gross NPL ratio for most players is low at 0.3-1.5% (see Exhibit 68) despite

diversification into loans against property (LAP) and other risky segments. Mahindra Housing

Finance is the only company to report gross NPL ratio of 6%, probably due to the volatility

of the underlying cash flow of the borrower.

Exhibit 68: Housing finance companies follow conservative lending practices; NPLs remain low Loan to value (LTV) and installment to income (IIR) ratio of housing finance companies, March fiscal year-end, 2014


Banks

Housing

finance

companies Total Units Refinance / unit

(Rs bn) (Rs bn) (Rs bn) (#) (Rs)

2011 1.8 16.8 20.0 42,859 466,646

2012 7.2 21.2 30.0 126,795 236,602

2013 18.0 19.4 40.0 356,480 112,208

Total 27.0 90.7 127.8 692,706 184,422

Target Achievement

Amt.

disbursed

Loan per

unit

('000 units) ('000 units) (%) (Rs bn) (Rs)

2002 175 187 107 32 173,334

2003 225 178 79 38 214,141

2004 250 244 98 64 260,633

2005 250 259 103 64 249,070

2006 275 299 109 84 280,160

2007 330 298 90 77 256,814

2008 350 272 78 88 325,701

2009 350 258 74 103 400,248

2010 350 388 111 156 401,375

2011 375 294 78 148 503,233

2012 375 338 90 172 510,066

2013 400 419 105 244 582,961

Notes:

(a) GJRHFS is Golden Jubilee Rural Housing Finance Scheme.

DHFL Gruh Finance

Indiabulls

Housing

Finance HDFC LICHF

Mahindra

Housing

PNB

Housing

Finance

Repco

Home

Finance

LTV (X) 50 55 55 65 53 50 67 65

IIR (X) 36 NA NA 35 35 NA 45 40

Gross NPLs (%) 0.8 0.3 0.26 (a) 0.7 0.6 6.0 0.3 1.5

Notes:

(a) Represents NPLs in the housing segment in 3QFY14.



Affordable bonds negative for HFCs, competitive dynamics unchanged

The recently announced affordable housing bonds for banks are directionally negative for

HFCs but we don’t think they will significantly alter the competitive dynamics of the housing

finance market in the near term. The RBI recently allowed banks to finance incremental

housing loans up to `5 mn through long-term bonds and provided concessions for

compliance with CRR, SLR and PSL on such loans. Such bonds put NBFCs at a disadvantage

compared to banks in the housing finance and infrastructure sectors but the near-term

competitive dynamics are expected to stay unchanged.

Limited downside to asset yields. Housing finance is a competitive business. Banks will

not be able to reduce home-loan rates by more than 10-15 bps (lower than base rates)

unless the base-rate system is dismantled. Hence we find limited asset-side competition

due to the issuance of affordable housing bonds.

We do not expect crowding out on the liability side. Issuance of long-term bonds by

banks poses a potential risk of crowding-out NBFCs in the debt market. But the tenure of

94% of HDFC’s bonds and 86% of LICHF’s bonds is up to five years, which reduces the

risk of their being crowded out by affordable housing or infrastructure bonds, which have

a tenure of 7-10 years. Exhibit 69 is a summary of bond issuances by HDFC and LICHF

between April 2011 and March 2014.

Exhibit 69: 85-95% of HDFC and LICHF borrowings have a tenure of less than five years Summary of HDFC and LICHF's bonds issued between April 2011 and March 2014

Source: Prime database, Kotak Institutional Equities

HDFC LICHF

Amt Share Amt Share

Original tenure (Rs bn) (% of total) (Rs bn) (% of total)

Upto 1 year 359 34 21 4

1-2 years 280 27 88 17

2-3 years 135 13 154 31

3-5 years 220 21 168 33

10 years 58 6 72 14

Total 1,053 502

Upto 5 years 995 430

% of total 94 86


Reverse valuation suggests stock is trading at 4.7X FY2017E EBITDA post completion of projects

We find the stock inexpensive at current levels, as it is not factoring in growth in earnings from

core business projects while discounting complete erosion of equity, which is likely to be

infused in the telecom venture by FY2017. Our reverse valuation exercise suggests that the RIL

stock is trading at 4.7X FY2017E EBITDA (see Exhibit 1), which will be the first year of

operations for ongoing core business projects. We expect core business projects (and modestly

weaker rupee-dollar exchange rate) to drive 51% growth in standalone EBITDA over the next

two years despite our assumptions of lower petchem margins, flattish core refining margins and

no increase in domestic gas production.

4-7% cut in EPS estimates driven by lower oil and gas prices

We revise our FY2015-17 EPS estimates (standalone) for RIL to `71.5 (-4.1%), `74 (-5.5%) and

`90 (-7.3%) to reflect (1) lower oil and gas prices, (2) modestly lower refining and petchem

margins and (3) other minor changes. We retain our ADD rating on the RIL stock with an

revised SOTP-based target price of `1,000 (`1,100 earlier) noting (1) inexpensive valuations at

10.4X FY2016E standalone EPS versus BSE-30 Index at ~16X and (2) strong earnings growth led

by core business projects. The moderate reduction in our SOTP-based valuation of RIL reflects

(1) cut in earnings estimates and (2) our assumption of `120 bn of incremental equity infusion

over the next two years in the telecom business, to which we ascribe nil equity value.

Potential losses from the telecom business may curtail earnings growth trajectory

Even though there is limited clarity with respect to the rollout plans of Reliance Jio’s telecom

services, one cannot rule out the possibility of significant losses in the initial years, given

(1) large operating overheads—empirical evidence suggests that it is difficult to turn EBITDA-

positive in the initial years of operations and (2) high fixed costs of depreciation/amortization

and interest on the indicated capital employed of `700 bn. We compute (1) about `35-`45 bn

of charges pertaining to depreciation and amortization and (2) around `20-`25 bn of interest

costs, in FY2016-17 assuming country-wide rollout of services. We note that Reliance Jio is

required to meet rollout obligations (different for different category of circles) by 2QFY16 in

order to comply with the rules of BWA spectrum.

Reliance Industries (RIL) Energy

Inexpensive valuations versus telecom overhang. We cut our FY2015-17 EPS

estimates for RIL by 4-7% to factor in lower oil prices and modestly lower downstream

margins. We retain our ADD rating on the stock with a revised SOTP-based TP of

`1,000 (`1,100 earlier) noting (1) robust earnings growth from core business projects

and (2) inexpensive valuations. Higher-than-expected value erosion from the telecom

foray is a key risk to our positive view on the stock.

ADD

JANUARY 09, 2015

UPDATE

Coverage view: Neutral

Price (`): 842

Target price (`): 1,000

BSE-30: 27,275

Reliance Industries

Stock data Forecasts/Valuations 2015 2016E 2017E

52-week range (Rs) (high,low) EPS (Rs) 71.5 74.0 90.0

Market Cap. (Rs bn) EPS growth (%) 5.1 3.6 21.6

Shareholding pattern (%) P/E (X) 11.8 11.4 9.4

Promoters 45.3 Sales (Rs bn) 3,708.7 3,260.8 3,611.2

FIIs 19.5 Net profits (Rs bn) 231.1 239.4 291.1

MFs 2.1 EBITDA (Rs bn) 322.6 345.2 487.7

Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.3 8.9 6.0

Absolute (10.9) (10.1) (0.8) ROE (%) 11.2 10.6 11.7

Rel. to BSE-30 (8.1) (13.5) (24.6) Div. Yield (%) 1.1 1.2 1.5

Company data and valuation summary

1,145-793

2,473.7

Energy Reliance Industries


Exhibit 1: The market is ascribing 4.7X EV/EBITDA multiple to RIL's core business

Implied EV/EBITDA for RIL's core business on FY2017E basis (` bn)


Key assumptions behind earnings model

We discuss the key assumptions behind our earnings model below.

Refining margins. We model FY2015, FY2016 and FY2017 refining margins at

US$8.5/bbl, US$8.5/bbl and US$10.5/bbl versus US$8.1/bbl in FY2014 (see Exhibit 2). The

sharp increase in FY2017E reflects expected benefits from the petcoke gasification

project.

Exhibit 2: Major assumptions for RIL's refining segment, March fiscal year-ends, 2010-17E (US$/bbl)


Petchem margins. Exhibit 3 shows our major assumptions for RIL’s chemical prices and

margins. We have factored in moderation of petchem margins over the next two years.

Market capitalization 2,476

Equity value of retail business 85

Equity value of shale business —

Equity value of telecom business —

Equity value attributable to core business 2,391

Net debt at standalone level 429

Other investments 537

EV of core business 2,284

FY2017 EBITDA 488

Implied EV/EBITDA of core business 4.7

2010 2011 2012 2013 2014 2015E 2016E 2017E

RIL refinery

Rupee-Dollar exchange rate 47.4 45.6 47.9 54.4 60.5 61.0 63.0 65.0

Import tariff on crude/fuel oil (%) 1.1 5.4 1.7 0.5 0.5 0.5 0.5 0.5

Refinery yield (per bbl of crude throughput) 82.1 96.0 128.3 128.3 121.2 98.7 79.0 85.7

Cost of inputs (per bbl of crude throughput) 75.7 88.4 121.5 120.3 114.2 90.7 71.4 75.9

Net refining margin 6.4 7.6 6.8 8.0 7.1 8.0 7.6 9.9

Crude throughput (mn tons) 34.5 34.5 35.2 35.6 37.7 37.8 37.8 37.8

Fuel and loss-own fuel used (%) 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Fuel & loss equivalent-gas used (%) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

SEZ refinery

Import tariff on crude/fuel oil (%) — 0.6 0.7 0.6 0.6 0.6 0.6 0.6

Refinery yield (per bbl of crude throughput) 71.1 91.9 129.8 129.7 124.2 99.6 80.2 86.2

Cost of inputs (per bbl of crude throughput) 64.2 82.7 119.3 119.2 114.7 90.4 70.5 74.9

Net refining margin 7.0 9.2 10.5 10.4 9.5 9.2 9.6 11.3

Crude throughput (mn tons) 26.4 32.1 32.4 32.9 30.3 30.8 30.8 30.8

Fuel and loss-own fuel used (%) 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5

Fuel & loss equivalent-gas used (%) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

Blended refining margin (US$/bbl) 6.6 8.4 8.6 9.2 8.1 8.5 8.5 10.5

Total crude throughput (mn tons) 60.9 66.6 67.6 68.5 68.0 68.5 68.5 68.5

Reliance Industries Energy


Exhibit 3: Key chemical prices and margins assumptions, March fiscal year-ends, 2010-17E (US$/ton)


E&P segment. We model FY2015-17E KG D-6 gas production at 12.5 mcm/d, 12 mcm/d

and 14 mcm/d. We assume modestly lower gas price of US$5.2/mn BTU for FY2016 and

US$5.4/mn BTU for FY2017 versus the current US$5.61/mn BTU given our expectations of

a reduction in domestic gas prices in the upcoming revision for 1HFY16. We now assume

crude price (Dated Brent) of US$87/bbl for FY2015E, US$70/bbl for FY2016E and

US$75/bbl for FY2017E.

Taxation. We model an effective tax rate of 22.5%, 23.8% and 29.7% for FY2015E,

FY2016E and FY2017E versus 21% in FY2014. We assume that RIL will continue to avail

of income tax exemption on gas production from the KG D-6 block and prepare our

forecasts accordingly.

Exchange rate. We assume US dollar-Indian rupee exchange rate for FY2015E,

FY2016E and FY2017E at `61/US$, `63/US$ and `65/US$.

2010 2011 2012 2013 2014 2015E 2016E 2017E

Chemical prices

LDPE 1,500 1,555 1,650 1,485 1,600 1,535 1,335 1,355

LLDPE 1,400 1,455 1,525 1,570 1,590 1,565 1,365 1,385

HDPE 1,375 1,415 1,550 1,560 1,585 1,560 1,360 1,380

Polypropylene 1,360 1,525 1,635 1,585 1,640 1,540 1,320 1,345

PVC 1,000 1,075 1,100 1,050 1,085 1,040 870 895

PFY 1,380 1,640 1,790 1,615 1,595 1,435 1,260 1,295

PSF 1,310 1,660 1,910 1,675 1,605 1,445 1,320 1,370

Paraxylene 1,050 1,125 1,550 1,520 1,420 1,120 1,020 1,045

Chemical margins

LLDPE—naphtha 770 725 590 645 695 790 740 720

HDPE—naphtha 745 685 615 635 690 785 735 715

PP—naphtha 730 795 700 660 745 765 695 680

PVC—1.025 x (0.235 x ethylene + 0.864 x EDC) 389 367 383 414 436 360 343 340

POY—naphtha 750 910 855 690 700 660 635 630

PSF—naphtha 680 930 975 750 710 670 695 705

PX—naphtha 420 395 615 595 525 345 395 380

POY—0.85 x PTA—0.34 x MEG 341 437 349 333 339 384 320 325

PSF—0.85 x PTA—0.34 x MEG 271 457 469 393 349 394 380 400

PTA—0.67 x PX 217 281 187 72 109 120 87 95

MEG – 0.6 x ethylene 116 290 470 256 223 93 123 133



Exhibit 4: Reliance's earnings have high leverage to refining margins Sensitivity of RIL's earnings to key variables


Exhibit 5: SOTP valuation of Reliance is `930 per share on FY2016E estimates Sum-of-the-parts valuation of Reliance Industries, FY2016E basis (`)


Fiscal 2015E Fiscal 2016E Fiscal 2017E

Downside Base case Upside Downside Base case Upside Downside Base case Upside

Exchange rate

Rupee-dollar exchange rate 60.0 61.0 62.0 62.0 63.0 64.0 64.0 65.0 66.0

Net profits (Rs mn) 224,884 231,061 237,238 233,144 239,382 245,619 282,563 291,085 299,608

EPS (Rs) 69.6 71.5 73.4 72.1 74.0 76.0 87.4 90.0 92.7

% upside/(downside) (2.7) 2.7 (2.6) 2.6 (2.9) 2.9

Chemical prices

Change in prices (%) (5.0) 5.0 (5.0) 5.0 (5.0) 5.0

Net profits (Rs mn) 223,106 231,061 239,016 230,097 239,382 248,667 275,536 291,085 305,484

EPS (Rs) 69.0 71.5 73.9 71.2 74.0 76.9 85.2 90.0 94.5

% upside/(downside) (3.4) 3.4 (3.9) 3.9 (5.3) 4.9

Blended refining margins

Margins (US$/bbl) 7.5 8.5 9.5 7.5 8.5 9.5 9.5 10.5 11.5

Net profits (Rs mn) 253,673 231,061 208,447 262,801 239,382 215,946 316,559 291,085 265,258

EPS (Rs) 78.5 71.5 64.5 81.3 74.0 66.8 97.9 90.0 82.0

% upside/(downside) 9.8 (9.8) 9.8 (9.8) 8.8 (8.9)

Natural gas price

Natural gas price (US$/bbl) 3.8 4.8 5.8 4.2 5.2 6.2 4.4 5.4 6.4

Net profits (Rs mn) 226,732 231,061 235,494 235,101 239,382 243,764 286,402 291,085 295,768

EPS (Rs) 70.1 71.5 72.8 72.7 74.0 75.4 88.6 90.0 91.5

% upside/(downside) (1.9) 1.9 (1.8) 1.8 (1.6) 1.6

Valuation base (Rs bn) Multiple (X) EV Valuation

Other EBITDA Multiple EV/EBITDA (Rs bn) (Rs/share)

Chemicals 124 6.0 743 253

Refining & Marketing 194 6.0 1,162 395

Oil and gas—PMT 16 3.0 49 17

Gas—KG-DWN-98/3 (a) 189 189 64

Oil—KG-DWN-98/3 (b) 5 5 2

Investments excluding subsidiaries 537 537 183

Retailing 106 0.8 85 29

Shale gas 102 — — —

Telecom 289 — — —

Capital WIP (book value) 571 1.0 571 194

Total enterprise value 3,341 1,136

Net debt 604 205

Implied equity value 2,737 931

Notes:

(a) We value KG D-6 block on DCF.

(b) 10 mn bbls of recoverable reserves.

(c) Capital WIP includes capex on petrochemical expansion and petcoke gasification projects.

(d) We use 2.94 bn shares (excluding treasury shares) for per share computations.

Reliance Industries Energy


Exhibit 6: SOTP valuation of Reliance is `1,080 per share on FY2017E estimates Sum-of-the-parts valuation of Reliance Industries, FY2017E basis (`)


Valuation base (Rs bn) Multiple (X) EV Valuation

Other EBITDA Multiple EV/EBITDA (Rs bn) (Rs/share)

Chemicals 188 6.0 1,130 384

Refining & Marketing 265 6.0 1,591 541

Oil and gas—PMT 16 2.5 41 14

Gas—KG-DWN-98/3 (a) 216 216 74

Oil—KG-DWN-98/3 (b) 5 5 2

Investments excluding subsidiaries 537 537 183

Retailing 106 0.8 85 29

Shale gas 102 — — —

Telecom 349 — — —

Capital WIP (book value) — 1.0 — —

Total enterprise value 3,604 1,226

Net debt 429 146

Implied equity value 3,175 1,080

Notes:

(a) We value KG D-6 block on DCF.

(b) 10 mn bbls of recoverable reserves.

(c) Capital WIP includes capex on petrochemical expansion and petcoke gasification projects.

(d) We use 2.94 bn shares (excluding treasury shares) for per share computations.



Exhibit 7: Standalone profit model, balance sheet, cash model, March fiscal year-ends, 2010-17E (` mn)


2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit model (Rs mn)

Net sales 1,924,610 2,481,700 3,299,040 3,602,970 3,901,170 3,708,674 3,260,774 3,611,194

EBITDA 305,807 381,257 336,190 307,870 308,770 322,571 345,211 487,704

Other income 24,605 30,517 61,920 79,980 89,360 86,122 73,992 71,605

Interest (19,972) (23,276) (26,670) (30,360) (32,060) (24,741) (17,228) (26,423)

Depreciation & depletion (104,965) (136,076) (113,940) (94,650) (87,890) (85,956) (87,661) (119,013)

Pretax profits 205,474 252,422 257,500 262,840 278,180 297,996 314,315 413,873

Extraordinary items — — — — — — — —

Tax (31,118) (43,204) (51,500) (52,440) (58,120) (64,685) (71,964) (86,750)

Deferred taxation (12,000) (6,355) (5,600) (370) (220) (2,250) (2,968) (36,038)

Net profits 162,357 202,863 200,400 210,030 219,840 231,061 239,382 291,085

Adjusted net profits 162,357 202,863 200,400 210,030 219,840 231,061 239,382 291,085

Earnings per share (Rs) 49.6 62.0 61.3 65.0 68.0 71.5 74.0 90.0

Balance sheet (Rs mn)

Total equity 1,371,706 1,515,403 1,660,960 1,800,200 1,970,910 2,164,756 2,365,319 2,606,998

Deferred taxation liability 109,263 115,618 121,220 121,930 122,150 124,400 127,369 163,407

Total borrowings 624,947 673,967 684,470 724,270 899,680 682,791 641,383 514,137

Currrent liabilities 404,148 542,206 484,750 538,710 683,090 626,136 543,908 580,038

Total liabilities and equity 2,510,064 2,847,194 2,951,400 3,185,110 3,675,830 3,598,084 3,677,978 3,864,579

Cash 134,627 271,349 395,980 495,470 366,240 132,380 37,548 84,642

Current assets 489,165 644,070 800,570 875,910 937,750 930,736 870,556 917,021

Total fixed assets 1,653,987 1,555,260 1,214,770 1,288,640 1,511,220 1,674,347 1,849,254 1,882,296

Investments 232,286 376,515 540,080 525,090 860,620 860,620 920,620 980,620

Total assets 2,510,064 2,847,194 2,951,400 3,185,110 3,675,830 3,598,084 3,677,978 3,864,579

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 222,605 304,310 265,810 237,080 235,920 221,797 241,523 372,821

Working capital (53,015) 695 (27,700) 57,820 145,150 (49,940) (22,047) (10,335)

Capital expenditure (219,427) (123,661) (80,080) (159,440) (324,560) (228,403) (232,950) (138,511)

Investments 14,206 (195,439) (201,760) (54,140) (385,430) — (60,000) (60,000)

Other income 22,043 23,316 18,930 65,280 69,290 86,122 73,992 71,605

Free cash flow (13,587) 9,220 (24,800) 146,600 (259,630) 29,576 517 235,580

Ratios (%)

Debt/equity 42.2 41.3 38.4 37.7 43.0 29.8 25.7 18.6

Net debt/equity 33.1 24.7 16.2 11.9 25.5 24.0 24.2 15.5

RoAE 12.1 13.4 11.9 11.3 10.8 10.4 9.9 11.0

RoACE 8.8 10.3 9.3 9.1 8.6 8.3 8.2 9.6

Adjusted RoACE 12.3 12.5 11.6 11.8 12.5 12.9 13.0 14.4


Earnings trends a mixed bag for individual companies, depending on the regional mix

Individually cement companies will report a mixed bag of results with strong earnings growth

for Ambuja Cement and India Cement (EBITDA growth of 48% yoy and 37% yoy respectively)

aided by strong realizations in East and South India. Ultratech’s 18% growth in EBITDA is

contributed mainly by higher volume growth (12% yoy) on an expanded capacity base with

incremental contribution from the acquired capacities of Jaiprakash Associates. ACC will

continue to report drab earnings with little cheer on the volume (4% yoy) or realization fronts

(2% yoy).

Fuel and freight costs are likely to continue to offer a cushion for most cement companies as

the benefit of declining prices of imported coal and lower freight costs trickle into the cost

structure of companies.

Subdued prices for the quarter with a delayed price uptick following the monsoons

Cement prices were weak for most of the quarter, with declining prices across most regions

except South India. North India saw cement prices come off by as much as `15/bag and Central

India saw prices come off by `10/bag. South India was relatively stable with cement prices

holding up with an upward bias (`10/bag improvement). We expect pan-India players to report

a sequential decline in cement realizations (2-3% qoq), while prices for a South-based player

like India Cement will likely hold steady.

The delayed post-monsoon uptick is likely to materialize from January 2015; our interaction

with dealers corroborated our thesis on price increases, as most dealers were hopeful of cement

prices improving by `10-15/bag over the next fortnight.

Steady volume growth aided by expanded capacity base of Ultratech

We expect marginal improvement in cement offtake with 7% yoy growth in 3QFY15 compared

to 6% yoy in 2QFY15. Among companies under our coverage, we expect Ultratech to remain

an outlier, aided by expanded capacity – we expect 12% yoy volume growth in 3QFY15 (15%

yoy in 1HFY15).

Among other pan-India names, we expect 4% yoy growth for ACC (1% yoy in 2QFY15) and

3% yoy growth for Ambuja. Among regional players, we expect better volume growth in North

India while South based players will be laggards; we expect 8% yoy growth for Shree Cement

and 4% yoy growth for India Cement.

Rich valuations prevent us from turning constructive, though pricing action may be strong

Large pan-India companies continue to trade at rich valuations – ACC, Ambuja Cement and

Ultratech Cement trade at peak trading multiples - 11-13X EV/EBITDA on FY2016E earnings.

While we may agree with earnings trajectory, rich valuations prevent us from taking a

constructive view on the names.

Cement India

3QFY15 preview –- the winter chill. A sequential decline of `7-10/bag in cement

prices will put the brakes on earnings momentum of cement companies that will see

little improvement in EBITDA/ton, compared to 2QFY15, as the advantage of a higher

volume base (post monsoon) would be lost to lower realizations. We expect sustained

volume trajectory (7% yoy) aided mainly by Ultratech, which continues to enjoy double-

digit volume growth, helped by an expanded capacity base.

CAUTIOUS

JANUARY 09, 2015

UPDATE

BSE-30: 27,275

India Cement


Pricing uptick from January is a repetitive seasonal pattern with the advent of the peak

construction season. Cement producers usually capitalize on opportunistic price increases as

higher seasonal demand coincides with cramped evacuation infrastructure since the Indian

Railways prioritizes its capacity for movement of agricultural products. The expected recovery

in the investment cycle is yet to reflect in demand improvement and trickle down to prices.

Our estimates factor in volume growth of 7-8% in FY2016E/17E. Our EBITDA estimates

build in 31%/24% growth in FY2016/17E, driven by higher volumes and prices.

Exhibit 1: Weak prices likely to result in a muted quarter for pan-India names, India Cement to benefit on stable prices in South India Operational estimates of cement companies for the quarter ending December 2014


Exhibit 2: We expect marginal improvement in volume growth compared to 2QFY15 (6% yoy) KIE volume estimates for the quarter ending December 2014 (mn tons)


ACC Ambuja Cements

Dec-14 Dec-13 Sep-14 % (yoy) % (qoq) Dec-14 Dec-13 Sep-14 % (yoy) % (qoq)Sales, mn tons 6.1 5.9 6 4 8 5.6 5.4 4.7 3 19

Realization (Rs/ton) 4,446 4,364 4,577 2 (3) 4,553 4,081 4,684 12 (3)

Operating costs (Rs/ton) 4,177 4,155 4,334 1 (4) 3,783 3,543 3,873 7 (2)

Profitability (Rs/ton) 430 448 5 39 (4) (20 ) 771 5 38 8 11 43 (5 )

UltraTech Cement India Cements

Dec-14 Dec-13 Sep-14 % (yoy) % (qoq) Dec-14 Dec-13 Sep-14 % (yoy) % (qoq)Sales, mn tons 10.9 9.7 10.4 12 5 2.4 2.3 2.4 4 1

Realization (Rs/ton) 5,120 4,934 5,200 4 (2) 4,809 4,518 4,814 6 (0)

Operating costs (Rs/ton) 4,294 4,147 4,398 4 (2) 3,975 3,889 4,052 2 (2)

Profitability (Rs/ton) 8 26 78 8 8 0 1 5 3 8 33 6 29 76 2 32 9

Dec-14 Dec-13 Sep-14 (yoy) (qoq)

ACC 6.1 5.9 5.6 4.1 8 .4

Ambuja Cements 5.6 5.4 4.7 3.4 18.9

India Cements 2.4 2.3 2.4 3.7 1.2

UltraTech Cement 10.9 9.7 10.4 12.3 5.3

Shree Cement 3.7 3.4 3.8 8 .0 (2.2)

Total 28 .6 26.7 26.8 7 .4 6 .9

Growth (%)

Cement India


Exhibit 3: Cement prices remained weak for most of the quarter Month end regional cement prices, December 2005 - December 2014 (`/50 kg bag)

Source: Industry, Kotak Institutional Equities estimates

Exhibit 4: Cement prices were more stable in South India Month-end regional cement prices, December 2005-December 2014 (`/50 kg bag)

Source: Industry, Kotak Institutional Equities estimates

125

165

205

245

285

325

365

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

North West All India average

120

160

200

240

280

320

360

400

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Central East South

India Cement


Exhibit 5: Earnings growth largely volume-driven in a weak pricing environment Estimates of earnings of cement companies for the quarter ended December 2014 (` mn)


Dec-13 Sep-14 Dec-14 yoy qoq

ACC

Net sales 26,934 27,419 28,074 4.2 2.4

EBITDA 2,626 3,060 2,627 0.0 (14.1)

EBIT 1,100 1,666 1,206 9.6 (27.6)

PBT 2,419 2,723 2,209 (8.7) (18.9)

PAT 2,022 2,049 1,616 (20.1) (21.1)

Extraordinaries 759 - -

PAT-reported 2,781 2,049 1,616 (41.9) (21.1)

Ambuja Cements

Net sales 21,913 21,876 25,291 15.4 15.6

EBITDA 2,890 3,789 4,280 48.1 13.0

EBIT 1,662 2,488 2,962 78.2 19.1

PBT 2,556 3,339 3,829 49.8 14.7

PAT 2,162 2,391 2,686 24.2 12.3

Extraordinaries 1,003 - -

PAT-reported 3,165 2,391 2,686 (15.1) 12.3

Grasim Industries

Net sales 70,666 78,664 78,648 11.3 (0.0)

EBITDA 9,836 10,960 12,217 24.2 11.5

EBIT 6,170 6,912 8,157 32.2 18.0

PBT 6,517 7,001 7,713 18.4 10.2

PAT 3,319 4,164 3,758 13.2 (9.7)

Extraordinaries - - -

PAT-reported 3,319 4,164 3,758 13.2 (9.7)

India Cements

Net sales 10,365 11,317 11,438 10.4 1.1

EBITDA 1,444 1,791 1,982 37.3 10.7

EBIT 757 1,128 1,303 72.0 15.5

PBT (24) 75 264 (1,217.8) 252.2

PAT (24) 75 198 (938.4) 164.2

Extraordinaries 28 - -

PAT-reported 4 75 198 4,610.9 164.2

Shree Cement

Net sales 13,170 16,053 15,120 14.8 (5.8)

EBITDA 2,694 3,376 2,676 (0.7) (20.7)

EBIT 1,538 1,150 1,050 (31.7) (8.6)

PBT 1,339 1,109 916 (31.6) (17.4)

PAT 1,187 1,155 733 (38.3) (36.6)

Extraordinaries (32) (67) -

PAT-reported 1,155 1,088 733 (36.6) (32.7)

UltraTech Cement

Net sales 47,864 53,818 55,788 16.6 3.7

EBITDA 7,642 8,295 8,996 17.7 8.5

EBIT 4,997 5,271 5,932 18.7 12.5

PBT 5,088 5,055 5,697 12.0 12.7

PAT 3,698 4,101 4,102 10.9 0.0

Extraordinaries - - -

PAT-reported 3,698 4,101 4,102 10.9 0.0

Change (%)

Cement India


Exhibit 6: Comparative valuation summary of cement companies (as of January 8, 2014)


Market cap. CMP (Rs) Target price EPS (Rs) P/E (X)

Company (US$ mn) 8 -Jan (Rs) Rating 20 14 20 15 E 20 16 E 20 16 E 20 14 20 15 E 20 16 E 20 17E

ACC 4,294 1,394 1,280 SELL 46.0 50.4 68.8 90.5 30 28 20 15

Ambuja Cements 5,650 226 205 SELL 6.8 9.1 11.5 14.3 34 25 20 16

Grasim Industries 5,149 3,425 3,590 ADD 212.0 203.6 259.8 354.4 16 17 13 10

India Cements 434 86 100 REDUCE (2.3) 2.8 6.2 8.5 -38 31 14 10

Jaiprakash Associates 933 27 - RS (5.6) 1.1 4.5 4.5 -5 24 6 6

Shree Cement 5,232 9,162 6,400 SELL 235.9 255.1 374.3 480.5 39 36 24 19

UltraTech Cement 12,253 2,727 2,300 SELL 74.8 81.7 103.5 141.9 36 33 26 19

EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$)

Company 20 14 20 15 E 20 16 E 20 17E 20 14 20 15 E 20 16 E 20 17E 20 14 20 15 E 20 16 E 20 17E

ACC 17.3 15.5 10.8 8.0 162 152 140 127 127 124 105 100

Ambuja Cements 19.3 14.5 11.4 8.9 238 222 206 186 181 158 147 142

Grasim Industries 7.8 6.4 4.5 3.0 NA NA NA NA NA NA NA NA

India Cements 10.4 8.0 6.6 4.9 102 99 90 76 65 65 64 56

Jaiprakash Associates 13.0 12.9 10.0 9.7 NA NA NA NA NA NA NA NA

Shree Cement 22.8 18.0 13.5 11.1 331 314 285 245 303 202 200 196

UltraTech Cement 20.6 17.8 13.1 10.3 294 279 251 229 219 196 183 181

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December 2014: Results calendar

Mon Tue Wed Thu Fri Sat Sun

5-Jan 6-Jan 7-Jan 8-Jan 9-Jan 10-Jan

INFOSYS

BAJAJ CORP


CMC DCB BANK BAJAJ FINANCE BAJAJ AUTO AXIS BANK M&M FINANCIAL

INDUSIND BANK BAJAJ FINSERV BAJAJ HOLDINGS DHFL

RELIANCE INFRASTRUCTURE LIC HOUSING FINANCE DB CORP RELIANCE INDUSTRIES

NIIT TECHNOLOGIES FEDERAL BANK RS SOFTWARE

YES BANK TCS WIPRO


GRUH HINDUSTAN MEDIA VENTURES INGVYSYA BANK BIOCON COLGATE-PALMOLIVE

HINDUNILVR KIRLOSKAR OIL L&T FINANCE CAIRN COROMANDEL

HINDUSTAN ZINC KOTAK BANK MAHINDRA HOLIDAYS WABCO INDIA

MINDTREE SOUTHBANK ZEEMEDIA

TATASPONGE


CHOLA FINANCE RANBAXY LABORATORIES ASIAN PAINT BERGER PAINT

GSFC TORRENT PHARMACEUTICALS DR REDDY ICICIBANK

KARNATAKA BANK HDFC MAHINDRA LIFESPACE

MARUTI IDFC MONSANTO

2-Feb 3-Feb 4-Feb 5-Feb 6-Feb 7-Feb

GICHSGFIN TATA POWER GODREJ CONSUMER JK CEMENT


CARE RATING


AMBUJA CEMENTS

Source: BSE, Kotak Institutional Equities

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo

Company Rating 8-Jan-15 (Rs) (%) (Rs mn) (US$ mn) (mn) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E (US$ mn)

Automobiles

Amara Raja Batteries SELL 825 550 (33.3) 140,920 2,248 171 24.4 29.9 35.4 13.6 22.5 18.4 33.8 27.6 23.3 20.5 17.0 14.7 8.4 6.8 5.6 0.6 0.7 0.9 27.4 27.2 26.3 4.0

Apollo Tyres BUY 227 250 10.3 115,370 1,841 509 22.1 23.6 24.8 4.2 6.4 5.4 10.2 9.6 9.1 5.7 5.9 5.7 2.0 1.7 1.4 0.4 0.4 0.4 22.0 19.3 17.1 15.5

Ashok Leyland SELL 61 40 (34.7) 174,310 2,781 2,848 0.4 1.9 2.7 121.2 401.7 42.0 161.1 32.1 22.6 23.2 14.9 12.1 3.3 3.1 3.0 — 1.4 2.0 2.2 10.0 13.5 15.5

Bajaj Auto ADD 2,450 2,650 8.1 709,065 11,313 289 106.2 133.3 152.6 (5.2) 25.4 14.5 23.1 18.4 16.1 16.6 14.4 12.9 6.3 5.3 4.5 1.7 2.2 2.5 29.5 31.4 30.5 12.3

Bharat Forge SELL 931 630 (32.3) 216,685 3,457 237 29.5 35.9 42.2 40.5 21.7 17.3 31.5 25.9 22.1 16.4 14.0 12.3 6.8 5.7 4.7 0.6 0.7 0.9 23.7 23.9 23.4 14.6

Eicher Motors SELL 14,874 9,000 (39.5) 403,148 6,432 27 238.0 380.8 483.2 63.3 60.0 26.9 62.5 39.1 30.8 35.1 22.7 18.1 15.4 11.3 8.5 0.2 0.2 0.2 27.5 33.4 31.4 12.9

Exide Industries REDUCE 186 160 (13.8) 157,760 2,517 850 7.1 8.9 10.3 24.2 24.9 15.9 26.1 20.9 18.0 16.3 13.4 11.8 3.9 3.4 3.0 1.4 1.4 1.4 15.5 17.4 17.9 7.2

Hero Motocorp BUY 2,984 3,650 22.3 595,868 9,507 200 146.2 195.5 230.6 38.4 33.8 18.0 20.4 15.3 12.9 15.8 11.9 10.4 8.8 7.1 5.8 2.4 3.3 3.9 47.0 51.6 49.7 32.7

Mahindra & Mahindra REDUCE 1,238 1,275 3.0 768,664 12,264 562 58.7 63.4 79.1 (14.3) 7.9 24.8 21.1 19.5 15.7 16.6 15.6 12.8 3.9 3.7 3.3 0.5 0.7 1.4 18.9 19.3 22.1 20.4

Maruti Suzuki BUY 3,476 4,000 15.1 1,049,879 16,750 302 117.2 189.4 249.5 27.2 61.6 31.7 29.7 18.3 13.9 17.2 11.6 8.9 4.5 3.8 3.2 0.8 1.4 1.8 15.9 22.4 25.0 16.2

Motherson Sumi Systems REDUCE 443 370 (16.5) 390,601 6,232 882 9.7 15.5 22.6 (4.2) 59.2 45.7 45.5 28.6 19.6 14.7 10.7 7.9 10.4 7.7 5.5 0.6 1.0 1.5 25.6 30.9 32.6 16.4

Tata Motors BUY 512 680 32.8 1,543,570 24,627 3,218 51.9 69.1 79.6 11.6 33.1 15.2 9.9 7.4 6.4 4.7 4.0 3.4 2.0 1.6 1.3 — — — 22.6 23.8 21.8 39.9

WABCO India ADD 4,597 4,900 6.6 87,202 1,391 19 72.7 130.4 159.9 25.3 79.5 22.6 63.3 35.2 28.8 38.7 22.4 18.2 10.0 8.4 6.9 0.2 0.7 0.9 17.0 25.9 26.3 0.5

Automobiles Attractive 6,353,042 101,361 12.6 34.1 19.5 18.6 13.9 11.6 9.9 7.9 6.7 3.8 3.1 2.5 0.7 1.1 1.4 20.2 22.3 21.9 208.1

Banks/Financial Institutions

Axis Bank ADD 502 525 4.6 1,186,243 18,926 2,349 29.5 35.2 40.3 11.3 19.6 14.5 17.0 14.3 12.4 — — — 2.7 2.3 2.0 1.0 1.2 1.4 16.9 17.6 17.5 29.3

Bajaj Finserv ADD 1,290 1,380 7.0 205,240 3,275 159 102.5 113.9 128.7 6.4 11.0 13.0 12.6 11.3 10.0 — — — 2.1 1.7 1.5 1.1 1.1 1.1 17.0 16.7 16.1 1.8

Bank of Baroda ADD 1,078 1,050 (2.6) 462,738 7,383 431 111.0 133.9 167.4 5.3 20.7 25.0 9.7 8.0 6.4 — — — 1.2 1.1 0.9 2.1 2.5 3.2 13.0 14.1 15.8 18.5

Bank of India ADD 296 320 8.1 190,174 3,034 643 58.6 65.7 89.9 38.0 12.1 36.8 5.1 4.5 3.3 — — — 0.6 0.5 0.5 2.3 2.6 3.6 13.5 13.5 16.2 17.1

Cholamandalam ADD 488 500 2.5 70,041 1,117 155 27.3 36.2 44.0 6.6 32.6 21.6 17.9 13.5 11.1 — — — 2.4 2.1 1.8 0.9 1.2 1.4 15.8 16.8 17.8 0.5

City Union Bank ADD 97 105 8.4 57,574 919 589 7.2 7.9 9.0 13.0 9.3 14.0 13.4 12.3 10.8 — — — 2.1 1.8 1.6 1.2 1.3 1.5 17.9 16.0 16.0 1.1

DCB Bank BUY 121 120 (0.8) 34,061 543 281 6.6 7.7 9.0 9.4 16.8 17.1 18.3 15.7 13.4 — — — 2.1 1.9 1.7 - - - 14.1 13.2 13.5 2.6

Dewan Housing Finance BUY 421 540 28.4 54,104 863 128 50.5 58.6 67.9 21.9 15.9 15.9 8.3 7.2 6.2 — — — 1.3 1.2 1.0 1.3 1.6 1.8 16.8 16.9 16.9 6.0

Federal Bank BUY 149 145 (2.4) 127,070 2,027 855 12.0 14.0 15.9 22.5 16.5 13.7 12.4 10.6 9.3 — — — 1.6 1.5 1.3 1.6 1.9 2.2 14.0 14.6 14.8 9.0

HDFC ADD 1,123 1,210 7.7 1,765,967 28,175 1,561 41.3 48.1 56.9 18.4 16.4 18.4 27.2 23.4 19.7 — — — 6.1 5.5 4.9 1.5 1.8 2.1 21.8 22.6 23.7 38.6

HDFC Bank ADD 965 1,000 3.6 2,332,436 37,213 2,399 43.1 51.7 60.4 22.0 19.8 16.9 22.4 18.7 16.0 — — — 4.5 3.8 3.2 0.9 1.0 1.2 21.8 22.0 21.7 28.5

ICICI Bank BUY 347 400 15.1 2,012,288 32,105 5,775 19.0 22.3 26.0 12.0 17.2 16.7 18.3 15.6 13.3 — — — 2.5 2.3 2.0 1.6 1.9 2.2 14.3 15.2 16.1 63.4

IDFC BUY 157 200 27.7 249,151 3,975 1,585 10.1 9.1 11.9 (16.0) (10.3) 31.8 15.5 17.3 13.1 — — — 1.4 1.3 1.2 1.2 0.5 0.6 10.0 8.1 9.8 15.3

IIFL Holdings BUY 171 175 2.4 52,316 835 296 14.0 16.5 19.2 49.3 17.5 16.7 12.2 10.4 8.9 — — — 2.0 1.8 1.6 2.1 2.5 2.9 18.5 19.1 19.6 0.4

IndusInd Bank ADD 799 830 3.9 422,556 6,742 526 33.7 39.4 46.2 25.9 16.9 17.1 23.7 20.2 17.3 — — — 4.0 3.4 2.9 0.6 0.6 0.8 19.1 18.8 18.8 11.0

J&K Bank REDUCE 147 135 (8.3) 71,359 1,139 485 17.9 20.6 22.1 (26.7) 15.2 7.5 8.2 7.2 6.6 — — — 1.1 1.0 0.9 2.5 2.9 3.1 14.3 14.8 14.2 1.8

Karur Vysya Bank BUY 575 620 7.9 69,466 1,108 121 48.0 65.0 77.1 19.8 35.4 18.6 12.0 8.8 7.5 — — — 1.6 1.4 1.2 2.1 2.8 3.4 15.1 16.9 17.7 1.2

L&T Finance Holdings ADD 67 80 19.3 115,290 1,839 1,718 4.9 5.6 6.9 42.9 13.6 22.1 13.6 11.9 9.8 — — — 1.8 1.6 1.4 2.2 1.2 1.2 13.9 14.2 15.3 5.1

LIC Housing Finance ADD 469 450 (4.1) 236,763 3,777 505 30.8 36.3 43.1 17.9 17.9 18.9 15.2 12.9 10.9 — — — 2.9 2.5 2.2 1.1 1.3 1.6 19.1 19.3 19.6 22.3

Magma Fincorp ADD 107 135 26.4 20,333 324 190 9.5 12.0 13.5 32.3 26.5 13.0 11.3 8.9 7.9 — — — 1.2 1.1 1.0 1.4 1.8 2.0 11.2 13.3 13.8 0.2

Mahindra & Mahindra Financial SELL 318 260 (18.3) 180,981 2,887 564 17.2 20.0 25.2 9.2 16.6 25.6 18.5 15.9 12.6 — — — 3.1 2.7 2.3 1.3 1.5 1.9 17.8 18.2 19.9 6.4

Max India ADD 390 450 15.3 104,012 1,659 266 7.8 10.5 13.9 48.1 35.9 31.9 50.3 37.0 28.1 — — — 2.9 2.5 2.1 1.4 1.9 2.4 6.3 7.3 8.2 3.1

Muthoot Finance BUY 197 235 19.6 78,043 1,245 397 18.3 22.5 27.7 (12.9) 23.1 23.2 10.8 8.7 7.1 — — — 1.5 1.4 1.2 2.8 3.4 4.2 15.4 16.4 18.1 0.6

Oriental Bank of Commerce ADD 321 300 (6.4) 96,117 1,534 300 42.5 51.4 61.5 11.8 20.9 19.8 7.5 6.2 5.2 — — — 0.7 0.6 0.6 2.7 3.2 3.8 9.2 10.3 11.4 10.3

PFC ADD 280 330 18.1 368,951 5,887 1,319 45.2 43.4 45.4 10.2 (4.1) 4.6 6.2 6.4 6.2 — — — 1.2 1.0 0.9 3.6 3.4 3.6 20.2 16.9 15.6 14.4

Punjab National Bank REDUCE 207 180 (12.9) 373,928 5,966 1,810 24.8 28.6 33.0 34.2 15.4 15.4 8.3 7.2 6.3 — — — 1.0 1.0 0.9 6.5 7.5 8.7 12.7 13.9 15.3 19.8

Rural Electrification Corp. ADD 321 350 9.1 316,876 5,056 987 55.1 54.0 55.4 16.1 (2.0) 2.6 5.8 5.9 5.8 — — — 1.3 1.1 1.0 3.4 3.6 3.7 23.7 19.6 17.5 14.9

Shriram City Union Finance REDUCE 1,990 1,550 (22.1) 131,151 2,092 66 89.7 113.9 131.8 4.1 26.9 15.8 22.2 17.5 15.1 — — — 3.1 2.7 2.3 0.5 0.6 0.7 16.6 16.5 16.6 1.1

Shriram Transport ADD 1,053 1,150 9.2 238,998 3,813 223 63.6 82.4 99.8 12.3 29.5 21.2 16.6 12.8 10.6 — — — 2.5 2.1 1.8 0.8 1.1 1.3 16.0 18.0 18.7 12.5

SKS Microfinance ADD 433 400 (7.7) 54,635 872 126 16.4 20.2 27.4 154.2 23.0 35.3 26.3 21.4 15.8 — — — 5.1 4.1 3.3 - - - 27.2 21.4 23.1 14.8

State Bank of India ADD 305 330 8.2 2,275,928 36,312 7,466 18.8 21.6 26.9 28.8 15.2 24.1 16.2 14.1 11.3 — — — 1.8 1.6 1.4 1.0 1.1 1.2 11.3 11.9 13.3 88.6

YES Bank ADD 769 680 (11.6) 320,932 5,120 414 44.4 47.6 56.3 (1.1) 7.3 18.3 17.3 16.2 13.7 — — — 2.8 2.4 2.1 1.0 1.1 1.3 19.7 16.0 16.6 29.5

Banks/Financial Institutions Attractive 14,629,970 233,417 18.2 14.6 18.3 14.8 12.9 10.9 2.1 1.9 1.7 1.5 1.7 2.0 14.2 14.6 15.3 522.9

Dividend yield (%) RoE (%)Price/BV (X)


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Target O/S



Cement

ACC SELL 1,394 1,280 (8.2) 261,717 4,176 188 50.4 68.8 90.5 7.6 36.6 31.5 27.7 20.3 15.4 15.5 10.7 8.0 3.1 2.8 2.5 1.7 1.7 1.7 11.6 14.6 17.1 7.9

Ambuja Cements SELL 226 205 (9.5) 350,862 5,598 1,522 9.1 11.5 14.3 35.2 26.3 23.5 24.8 19.6 15.9 15.7 12.4 9.7 3.2 3.0 2.6 1.4 1.5 1.7 13.3 15.7 17.4 5.9

Grasim Industries ADD 3,425 3,590 4.8 314,578 5,019 92 203.9 260.2 355.0 (4.0) 27.6 36.4 16.8 13.2 9.6 6.8 4.8 3.2 1.4 1.2 1.1 1.1 1.1 1.1 8.4 9.9 12.2 4.2

India Cements REDUCE 86 100 16.1 26,463 422 307 2.8 6.2 12.8 224.0 126.9 104.4 31.3 13.8 6.7 7.9 6.4 5.2 0.7 0.7 0.6 3.1 3.1 3.1 2.2 5.0 9.8 4.3

Shree Cement SELL 9,162 6,400 (30.1) 319,170 5,092 35 255.1 374.3 480.5 8.1 46.7 28.4 35.9 24.5 19.1 18.0 13.5 10.9 6.0 4.9 4.0 0.2 0.2 0.2 18.0 22.1 23.1 1.6

UltraTech Cement SELL 2,727 2,300 (15.7) 748,422 11,941 274 81.6 103.4 141.7 9.2 26.7 37.1 33.4 26.4 19.2 18.0 13.2 10.1 3.9 3.5 3.0 0.4 0.4 0.4 12.4 14.0 16.6 9.6

Cement Cautious 2,021,213 32,248 11.4 31.7 33.9 27.2 20.7 15.5 13.2 9.8 7.3 2.9 2.6 2.3 0.8 0.9 0.9 10.5 12.5 14.6 33.4

Consumer products

Asian Paints REDUCE 820 750 (8.6) 786,878 12,554 959 16.4 21.9 24.9 27.7 33.7 13.9 50.2 37.5 32.9 31.8 23.5 20.7 16.2 13.0 10.6 0.8 0.9 1.1 35.3 38.4 35.5 18.1

Bajaj Corp. BUY 409 390 (4.7) 60,379 963 148 14.7 17.4 20.2 22.2 18.2 16.4 27.8 23.5 20.2 24.8 20.1 16.3 12.3 10.9 9.4 2.8 2.1 2.7 43.0 49.1 49.9 2.3

Britannia Industries BUY 1,969 2,050 4.1 236,158 3,768 120 48.3 61.0 70.8 46.5 26.1 16.2 40.7 32.3 27.8 26.2 20.8 17.8 18.4 13.5 10.4 0.8 1.0 1.2 55.6 48.2 42.4 4.1

Colgate-Palmolive (India) ADD 1,925 1,970 2.3 261,773 4,177 136 42.2 51.0 60.3 16.9 20.9 18.2 45.7 37.8 31.9 31.2 25.2 20.8 40.2 35.7 31.7 1.7 1.9 2.3 91.7 100.2 105.2 5.3

Dabur India ADD 230 260 13.0 403,998 6,446 1,744 6.1 7.8 9.0 18.0 26.6 15.3 37.5 29.6 25.7 29.6 23.3 19.8 12.2 9.8 8.1 1.0 1.2 1.4 35.9 36.7 34.5 4.8

GlaxoSmithKline Consumer REDUCE 5,747 5,800 0.9 241,689 3,856 42 142.1 166.7 192.6 (11.5) 17.4 15.5 40.5 34.5 29.8 30.1 24.3 20.4 11.2 9.4 8.1 0.9 1.0 1.3 30.0 29.7 29.2 0.9

Godrej Consumer Products REDUCE 990 960 (3.0) 337,090 5,378 340 26.1 32.7 38.3 17.0 25.3 16.8 37.9 30.2 25.9 25.6 20.2 16.9 7.6 6.5 5.6 0.6 0.8 0.9 21.7 23.2 23.2 2.6

Hindustan Unilever ADD 817 800 (2.1) 1,767,468 28,199 2,163 19.0 22.2 24.9 15.6 16.6 12.5 43.0 36.9 32.8 32.1 26.2 22.9 44.8 36.5 30.4 1.7 1.8 2.1 113.8 109.1 101.1 13.2

ITC ADD 362 410 13.1 2,897,546 46,229 8,096 12.2 14.1 16.1 14.1 15.4 14.4 29.7 25.8 22.5 19.6 16.6 14.1 10.1 8.9 8.0 2.0 2.3 2.7 31.8 33.0 36.1 41.1

Jubilant Foodworks SELL 1,352 1,100 (18.6) 88,629 1,414 66 18.0 25.8 36.2 17.4 43.2 40.3 75.1 52.4 37.4 34.2 24.5 17.7 13.3 10.6 8.3 — — 0.1 19.5 22.6 25.2 5.7

Jyothy Laboratories REDUCE 264 250 (5.3) 47,799 763 181 9.5 11.6 15.2 102.4 22.2 30.2 27.7 22.7 17.4 25.8 18.3 15.6 5.9 5.1 4.9 1.1 1.3 1.5 22.3 24.1 28.8 1.0

Marico BUY 322 370 15.1 207,369 3,309 645 9.2 11.9 13.6 16.1 30.3 14.0 35.1 27.0 23.7 23.3 17.8 15.3 11.8 9.1 7.3 0.8 1.0 1.2 37.8 38.0 34.2 3.2

Nestle India REDUCE 6,300 5,950 (5.6) 607,462 9,692 96 121.9 159.4 185.9 6.5 30.8 16.6 51.7 39.5 33.9 29.1 23.0 20.5 20.3 15.8 12.8 0.8 1.0 1.2 46.0 46.9 43.4 2.1

Page Industries SELL 11,194 7,500 (33.0) 124,858 1,992 11 180.6 223.2 273.6 31.0 23.6 22.6 62.0 50.2 40.9 38.8 31.5 25.7 31.8 23.5 17.2 0.7 0.8 0.8 59.2 54.0 48.6 2.9

Pidilite Industries ADD 520 540 3.9 266,482 4,252 513 11.4 15.7 18.3 27.7 38.1 16.9 45.7 33.1 28.3 31.0 22.1 18.5 11.5 9.5 7.9 0.7 0.9 1.2 27.3 31.4 30.3 3.1

Speciality Restaurants REDUCE 193 175 (9.1) 9,039 144 47 2.6 4.0 6.3 (34.8) 53.6 55.8 73.4 47.8 30.7 25.1 17.1 11.8 2.9 2.7 2.5 0.5 0.5 0.6 4.0 5.8 8.4 0.3

Tata Global Beverages REDUCE 154 160 4.1 95,048 1,516 631 6.5 7.7 8.8 18.3 18.1 15.0 23.6 20.0 17.4 12.2 10.7 9.3 1.6 1.5 1.4 1.5 1.6 2.0 6.9 7.8 8.5 6.4

Titan Company REDUCE 373 350 (6.1) 331,055 5,282 888 9.4 11.1 13.0 11.1 18.4 16.8 39.8 33.6 28.8 27.1 21.5 18.3 10.8 9.1 7.8 0.7 1.1 1.3 29.7 29.4 29.2 6.6

United Breweries SELL 893 650 (27.2) 236,206 3,769 264 10.1 13.6 17.4 18.1 34.0 28.7 88.3 65.9 51.2 36.2 30.2 25.2 12.7 11.0 9.3 0.2 0.2 0.3 15.0 17.9 19.7 3.1

United Spirits BUY 2,833 3,200 12.9 411,779 6,570 145 24.7 67.3 83.6 375.8 172.3 24.3 114.7 42.1 33.9 40.0 23.7 20.3 13.2 10.3 8.2 0.1 0.2 0.3 11.7 27.5 26.9 11.0

Consumer products Cautious 9,418,706 150,273 18.7 23.1 15.9 38.8 31.5 27.2 25.8 20.7 17.7 12.8 10.9 9.4 1.3 1.5 1.8 32.9 34.6 34.5 137.6

Energy

Aban Offshore RS 482 — — 27,429 438 57 99.6 106.8 110.5 18.8 7.2 3.5 4.8 4.5 4.4 6.6 6.2 5.9 0.5 0.5 0.4 1.5 1.2 1.2 12.3 11.4 10.7 16.9

Bharat Petroleum ADD 678 800 18.1 489,962 7,817 723 44.2 56.3 58.8 (21.2) 27.3 4.4 15.3 12.0 11.5 7.9 6.4 6.2 2.3 2.0 1.8 2.0 2.5 2.6 15.6 17.9 16.7 19.2

Cairn India REDUCE 242 275 13.8 452,866 7,225 1,875 47.9 38.5 31.3 (26.4) (19.8) (18.6) 5.0 6.3 7.7 3.6 4.1 3.8 0.7 0.7 0.7 5.1 5.0 5.0 15.2 11.4 8.8 11.9

Castrol India SELL 523 300 (42.6) 258,705 4,128 495 10.0 11.4 12.6 (0.2) 14.3 10.5 52.5 45.9 41.6 34.9 30.5 27.5 48.2 45.7 43.5 1.5 1.7 1.9 76.5 102.1 107.3 3.5

GAIL (India) ADD 431 460 6.8 546,397 8,718 1,268 27.8 26.9 34.4 (14.9) (3.2) 27.9 15.5 16.0 12.5 11.0 10.2 7.9 1.9 1.8 1.6 1.9 2.0 2.8 12.5 11.3 13.4 13.7

GSPL ADD 129 105 (18.3) 72,323 1,154 563 7.5 8.7 10.0 0.9 15.5 15.3 17.1 14.8 12.8 8.0 7.1 6.2 2.0 1.8 1.7 1.2 2.0 3.1 12.1 12.7 13.6 3.1

Hindustan Petroleum REDUCE 598 540 (9.7) 202,516 3,231 339 46.3 57.8 58.2 (9.6) 24.9 0.7 12.9 10.3 10.3 10.4 7.7 6.9 1.3 1.2 1.1 2.3 2.9 2.9 10.1 11.8 11.0 19.6

Indian Oil Corporation ADD 344 375 9.2 834,002 13,306 2,428 16.2 34.1 37.0 (33.2) 110.5 8.6 21.2 10.1 9.3 11.2 5.9 5.0 1.2 1.1 1.0 1.8 3.3 3.6 5.8 11.5 11.5 8.2

Oil & Natural Gas Corporation ADD 342 365 6.8 2,924,266 46,656 8,556 28.8 33.0 38.4 (7.4) 14.8 16.4 11.9 10.4 8.9 5.0 4.3 3.7 1.6 1.4 1.3 2.9 3.7 4.2 13.6 14.5 15.5 29.8

Oil India ADD 550 615 11.8 330,805 5,278 601 49.5 58.3 65.3 (0.3) 18.0 12.0 11.1 9.4 8.4 7.3 5.9 5.3 1.5 1.4 1.3 3.6 4.4 4.9 13.8 15.2 15.7 3.6

Petronet LNG REDUCE 217 190 (12.5) 162,900 2,599 750 10.9 12.5 15.4 14.8 14.9 23.0 19.9 17.3 14.1 10.8 10.0 8.3 2.9 2.6 2.3 1.0 1.5 2.1 15.4 15.9 17.4 4.2

Reliance Industries ADD 842 1,000 18.8 2,473,733 39,468 3,233 71.5 74.0 90.0 5.1 3.6 21.6 11.8 11.4 9.4 9.3 8.9 6.0 1.3 1.2 1.0 1.1 1.2 1.5 11.2 10.6 11.7 51.7

Energy Neutral 8,775,903 140,017 (9.3) 12.2 13.4 11.8 10.5 9.3 7.3 6.2 5.1 1.4 1.3 1.2 2.2 2.7 3.2 11.6 12.0 12.5 185.5



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Target O/S



Industrials

ABB SELL 1,288 700 (45.7) 272,938 4,355 212 11.6 24.0 32.2 38.6 107.4 34.3 111.4 53.7 40.0 59.4 33.9 26.7 9.6 8.4 7.1 0.3 0.3 0.3 8.9 16.7 19.2 2.3

Bharat Heavy Electricals SELL 258 200 (22.3) 630,379 10,058 2,448 11.6 13.7 15.9 (18.1) 18.0 16.6 22.2 18.8 16.2 14.4 10.9 8.0 1.8 1.7 1.6 1.0 1.1 1.3 8.3 9.2 10.0 22.5

Crompton Greaves BUY 185 210 13.6 115,854 1,848 627 5.7 9.2 13.1 45.7 61.3 42.5 32.5 20.2 14.2 16.4 11.8 8.8 3.0 2.5 2.2 0.7 0.8 0.9 9.4 13.4 16.3 20.6

Cummins India REDUCE 893 720 (19.4) 247,595 3,950 277 26.7 32.6 43.7 25.3 21.9 34.2 33.4 27.4 20.4 30.5 21.8 15.9 8.3 7.2 6.0 1.2 1.5 1.9 26.7 28.1 32.0 2.9

Kalpataru Power Transmission ADD 244 200 (18.1) 37,490 598 153 9.9 8.7 11.6 24.3 (12.4) 33.3 24.7 28.2 21.1 9.3 7.9 6.9 1.7 1.6 1.5 0.6 0.6 0.6 7.0 5.8 7.4 1.9

KEC International ADD 92 115 24.7 23,704 378 257 4.5 8.5 12.1 37.6 87.6 41.8 20.3 10.8 7.6 7.9 6.2 5.0 1.7 1.5 1.3 1.1 2.1 3.0 8.9 14.5 18.2 0.7

Larsen & Toubro ADD 1,510 1,650 9.3 1,402,609 22,378 927 40.7 58.6 78.8 (16.3) 43.8 34.4 37.1 25.8 19.2 19.6 15.0 13.0 3.7 3.3 2.9 1— 1— 1— 10.4 13.5 16.2 43.2

Siemens SELL 920 600 (34.8) 327,773 5,230 356 17.8 24.3 29.9 104.7 36.2 23.1 51.6 37.9 30.8 29.2 22.3 18.1 7.3 6.5 5.7 0.6 0.8 1.0 14.3 18.0 19.6 4.9

Thermax REDUCE 1,045 850 (18.7) 124,542 1,987 119 22.7 33.5 45.9 10.1 47.5 36.8 46.0 31.2 22.8 32.0 20.6 14.6 5.7 5.1 4.5 0.8 1.0 1.3 12.8 17.2 20.8 1.1

Voltas REDUCE 243 260 6.8 80,521 1,285 331 8.7 12.0 14.2 16.9 38.4 18.6 28.0 20.3 17.1 23.0 15.0 12.3 4.0 3.5 3.1 0.9 1.5 1.8 14.9 18.5 19.4 11.0

Industrials Neutral 3,263,405 52,067 (5.8) 35.7 29.0 34.7 25.5 19.8 20.1 15.2 12.6 3.4 3.1 2.8 0.8 1.0 1.2 9.8 12.2 14.1 111.0

Infrastructure

Adani Port and SEZ REDUCE 335 300 (10.3) 692,536 11,049 2,084 12.0 16.5 21.2 43.4 37.8 28.7 28.0 20.3 15.8 17.5 13.4 10.9 5.9 4.8 3.8 0.6 0.7 0.9 24.2 25.9 26.8 13.0

Container Corporation REDUCE 1,348 1,330 (1.3) 262,796 4,193 195 48.9 55.4 70.4 (3.1) 13.2 27.0 27.5 24.3 19.1 18.8 15.8 12.1 3.4 3.1 2.8 0.8 0.9 1.2 13.0 13.4 15.3 2.4

Gujarat Pipavav Port REDUCE 225 160 (28.9) 108,750 1,735 483 7.0 9.4 12.1 94.1 33.5 29.2 31.9 23.9 18.5 27.3 20.6 16.0 6.3 4.9 3.9 — — — 21.7 23.0 23.3 4.2

IRB Infrastructure REDUCE 238 210 (11.9) 79,236 1,264 332 13.3 15.3 20.9 (3.8) 15.4 36.4 17.9 15.5 11.4 8.7 7.6 7.5 2.1 1.9 1.7 1.7 1.7 1.7 11.9 12.7 15.5 11.8

Sadbhav Engineering buy 253 275 8.7 43,401 692 171 8.3 9.3 10.9 24.6 12.1 17.6 30.5 27.2 23.1 15.6 12.8 11.2 3.1 2.8 2.5 — — — 12.1 10.8 11.4 1.1

Infrastructure Attractive 1,186,718 18,934 26.4 29.0 28.8 27.1 21.0 16.3 15.8 12.6 10.5 4.5 3.8 3.2 0.6 0.7 0.9 16.5 18.1 19.6 32.5

Infrastructure

Info Edge ADD 848 1,070 26.1 101,979 1,627 120 10.1 16.5 26.7 23.0 63.9 61.5 84.0 51.3 31.8 78.7 43.6 23.2 6.8 6.4 5.8 0.4 0.7 1.1 11.1 12.8 19.2 2.2

Just Dial ADD 1,428 1,650 15.5 100,554 1,604 70 20.6 28.6 51.7 20.0 38.5 81.0 69.2 50.0 27.6 52.6 35.7 17.8 16.2 13.6 10.5 0.5 0.7 1.3 25.1 29.5 42.9 7.7

Internet Attractive 202,533 3,231 26.4 50.1 71.3 76.2 50.8 29.6 62.8 39.1 20.1 9.5 8.7 7.5 0.5 0.7 1.2 12.5 17.1 25.3 9.9

Media

DB Corp. ADD 395 375 (5.1) 72,534 1,157 183 18.7 23.3 27.1 12.1 24.5 16.1 21.1 16.9 14.6 12.1 9.8 8.4 5.6 4.9 4.3 2.3 2.8 3.5 28.1 30.7 31.2 0.3

DishTV ADD 69 70 2.0 73,056 1,166 1,065 (0.1) 1.4 3.2 93.5 1,516.7 135.4 (718.0) 50.7 21.5 11.4 9.2 7.1 4.4 4.4 4.4 — — — (0.6) 8.7 20.4 3.6

Jagran Prakashan ADD 135 150 11.4 44,035 703 311 7.7 9.7 11.5 2.6 26.1 18.5 17.5 13.9 11.7 9.6 8.0 6.8 4.0 3.6 3.2 3.0 3.7 4.5 23.8 27.1 28.7 0.6

Sun TV Network ADD 348 385 10.7 137,043 2,186 394 20.2 22.7 26.5 6.2 12.7 16.6 17.3 15.3 13.1 10.9 9.4 7.9 4.0 3.7 3.3 2.9 3.5 4.1 24.4 25.0 26.4 5.5

Zee Entertainment Enterprises ADD 365 375 2.9 350,084 5,585 960 8.6 10.4 12.8 (6.8) 21.4 23.4 42.6 35.1 28.4 24.9 21.0 17.3 6.7 6.1 5.4 1.2 1.5 1.8 16.5 18.2 20.2 18.5

Media Neutral 676,752 10,797 8.8 26.4 25.4 30.9 24.5 19.5 15.4 12.9 10.7 5.3 4.9 4.4 1.5 1.8 2.2 17.3 20.0 22.7 28.5

Metals & Mining

Coal India ADD 379 360 (5.1) 2,396,744 38,239 6,316 22.5 28.1 23.7 (5.9) 24.7 (15.5) 16.9 13.5 16.0 10.3 8.9 9.8 4.8 4.1 3.7 3.0 3.8 3.2 29.8 32.8 24.6 17.0

Hindalco Industries REDUCE 153 165 8.2 315,010 5,026 2,065 16.3 16.6 20.4 31.0 1.9 22.5 9.3 9.2 7.5 7.9 6.4 5.5 0.7 0.7 0.6 0.9 0.9 0.9 8.0 7.6 8.7 23.0

Hindustan Zinc ADD 165 190 15.3 696,544 11,113 4,225 16.9 18.3 19.3 2.7 8.1 5.8 9.8 9.0 8.5 5.8 4.5 3.5 1.6 1.4 1.3 2.1 2.1 2.1 17.8 16.8 15.7 3.4

Jindal Steel and Power REDUCE 158 160 1.3 144,463 2,305 915 15.9 21.6 25.6 (23.8) 35.9 18.6 9.9 7.3 6.2 8.1 6.2 5.7 0.7 0.6 0.6 1.2 1.2 1.2 6.6 8.9 9.7 18.6

JSW Steel BUY 1,022 1,490 45.8 247,064 3,942 242 111.0 140.2 160.0 67.8 26.3 14.1 9.2 7.3 6.4 5.6 5.0 4.4 1.0 0.9 0.8 1.2 1.2 1.2 11.6 13.1 13.3 10.3

National Aluminium Co. SELL 51 56 9.5 131,826 2,103 2,577 5.0 5.1 5.4 88.9 2.4 6.7 10.3 10.1 9.4 4.3 4.0 3.4 1.0 1.0 0.9 2.9 2.9 2.0 10.2 9.8 9.7 1.5

NMDC ADD 138 185 34.5 545,347 8,701 3,965 18.4 18.5 17.5 15.3 0.5 (5.6) 7.5 7.4 7.9 4.0 4.1 4.1 1.6 1.5 1.4 6.2 6.2 6.2 23.1 21.0 18.2 7.2

Sesa Sterlite BUY 211 250 18.8 624,067 9,957 2,965 21.3 17.4 21.6 25.9 (18.6) 24.3 9.9 12.1 9.8 5.4 5.2 4.1 0.8 0.8 0.7 1.5 1.5 1.5 8.4 6.5 7.7 19.4

Tata Steel REDUCE 395 495 25.3 383,582 6,120 971 38.9 45.6 56.2 4.4 17.0 23.4 10.1 8.7 7.0 6.3 6.1 5.4 0.9 0.8 0.7 2.0 2.0 2.0 8.9 9.7 11.0 37.5

Metals & Mining Cautious 5,484,647 87,506 8.6 10.4 2.4 11.5 10.5 10.2 6.7 6.0 5.3 1.6 1.4 1.3 2.7 3.1 2.8 13.6 13.7 12.9 137.9

Pharmaceutical

Biocon SELL 411 360 (12.3) 82,140 1,311 200 20.6 21.8 23.4 (0.5) 5.7 7.6 20.0 18.9 17.5 12.5 11.4 10.2 2.6 2.4 2.2 1.8 1.9 2.0 13.1 13.2 13.0 6.6

Cipla BUY 618 680 10.0 496,366 7,919 803 17.3 24.2 32.3 0.3 39.5 33.4 35.6 25.6 19.2 20.8 16.0 11.9 4.4 3.9 3.4 0.6 0.8 1.1 13.1 16.3 18.9 18.1

Dr Reddy's Laboratories ADD 3,066 3,175 3.5 522,172 8,331 170 135.2 141.6 154.6 7.5 4.7 9.2 22.7 21.7 19.8 14.9 13.6 11.8 4.7 4.0 3.4 0.7 0.7 0.8 22.8 19.9 18.5 17.5

Lupin BUY 1,407 1,600 13.7 631,906 10,082 450 53.9 59.5 71.0 32.1 10.4 19.2 26.1 23.6 19.8 15.9 13.9 11.3 7.0 5.6 4.5 0.6 0.6 0.8 30.2 26.3 25.1 12.0

Sun Pharmaceuticals SELL 819 790 (3.5) 1,695,820 27,056 2,072 31.2 34.0 37.9 13.2 8.7 11.5 26.2 24.1 21.6 19.1 16.0 14.2 6.9 5.5 4.5 0.9 1.0 1.2 30.1 25.4 22.9 30.2

Pharmaceuticals Neutral 3,428,404 54,699 13.1 11.5 15.4 26.4 23.7 20.5 17.7 15.1 12.8 5.8 4.8 4.0 0.8 0.9 1.0 22.1 20.3 19.5 84.5



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Real Estate

DLF BUY 143 210 47.1 254,370 4,058 1,781 2.9 4.1 6.0 (21.0) 42.0 48.5 49.8 35.1 23.6 15.5 13.4 9.6 0.9 0.9 0.8 2.0 1.4 1.4 1.8 2.5 3.6 35.4

Godrej Properties REDUCE 253 225 (10.9) 50,336 803 198 9.7 11.2 17.4 20.7 14.9 56.4 26.0 22.6 14.5 21.1 13.3 8.6 2.6 2.4 2.1 0.8 1.0 1.0 10.3 10.9 15.4 1.1

Oberoi Realty BUY 272 325 19.7 89,115 1,422 328 7.4 18.2 29.7 (21.9) 146.0 63.1 36.7 14.9 9.1 8.6 4.6 3.7 2.0 1.8 1.5 0.7 0.7 0.7 5.4 12.4 17.6 1.1

Prestige Estates Projects REDUCE 223 240 7.6 83,644 1,335 375 11.2 15.8 14.8 8.5 40.4 (6.0) 19.9 14.1 15.1 11.8 9.0 8.4 2.1 1.9 1.7 0.5 0.5 0.5 12.1 14.0 11.7 1.0

Sobha Developers ADD 464 540 16.3 45,531 726 98 23.0 36.2 67.1 (3.9) 57.2 85.3 20.2 12.8 6.9 9.9 7.6 4.8 1.9 1.7 1.4 1.5 1.5 1.5 9.6 13.8 21.9 1.7

Sunteck Realty ADD 264 410 55.6 16,592 265 60 10.7 81.2 88.8 (57.4) 656.7 9.3 24.6 3.2 3.0 24.0 2.7 1.5 2.3 1.4 0.9 4.2 4.2 — 9.7 52.7 37.5 0.2

Real Estate Attractive 539,587 8,609 (11.1) 80.1 39.2 32.6 18.1 13.0 13.4 9.2 7.0 1.3 1.2 1.1 1.2 1.2 1.1 3.9 6.6 8.6 40.6

Technology

HCL Technologies REDUCE 1,534 1,575 2.7 1,077,648 17,194 707 101.8 108.1 120.2 12.9 6.2 11.1 15.1 14.2 12.8 10.6 9.4 7.9 4.2 3.4 2.8 1.6 1.8 2.0 31.1 26.6 24.2 25.5

Hexaware Technologies SELL 201 195 (3.1) 60,531 966 302 11.1 13.4 15.6 (12.4) 20.7 16.9 18.2 15.0 12.9 12.1 10.3 8.8 6.3 5.7 5.0 4.4 4.0 4.7 31.0 39.8 41.5 6.9

Infosys ADD 1,973 2,350 19.1 2,266,453 36,161 1,143 107.7 124.4 146.4 13.3 15.5 17.7 18.3 15.9 13.5 12.8 10.6 8.7 4.3 3.7 3.2 1.8 2.1 2.4 25.5 25.2 25.3 113.7

Mindtree ADD 1,206 1,275 5.7 100,942 1,611 84 63.3 73.2 86.4 18.0 15.6 18.0 19.0 16.5 14.0 13.2 10.9 8.8 5.0 4.1 3.4 1.3 1.5 1.8 29.1 27.5 26.8 3.9

Mphasis SELL 383 400 4.5 80,410 1,283 210 33.0 34.4 37.9 124.5 4.2 10.2 11.6 11.1 10.1 6.3 5.8 5.1 1.5 1.4 1.3 4.3 4.5 5.0 13.2 13.0 13.6 0.6

TCS ADD 2,444 2,800 14.6 4,786,739 76,371 1,959 108.6 127.4 149.5 11.2 17.4 17.3 22.5 19.2 16.4 16.7 13.8 11.4 7.7 6.3 5.3 2.4 2.1 2.4 36.1 36.1 35.2 47.9

Tech Mahindra ADD 2,567 3,000 16.9 615,944 9,827 214 136.6 168.6 199.0 6.7 23.4 18.0 18.8 15.2 12.9 13.2 10.7 8.8 4.8 3.8 3.0 1.0 1.2 0.8 28.4 28.0 26.4 25.0

Wipro ADD 545 675 23.9 1,345,439 21,466 2,467 34.8 39.6 47.3 10.1 13.6 19.6 15.6 13.8 11.5 10.4 8.6 6.9 3.3 2.8 2.4 1.7 1.8 1.8 22.9 22.1 22.4 17.7

Technology Attractive 10,334,106 164,877 12.3 15.0 17.0 19.2 16.7 14.3 13.6 11.4 9.4 5.1 4.3 3.6 2.0 2.0 2.2 26.8 25.9 25.4 241.2

Telecom

Bharti Airtel BUY 361 430 19.1 1,443,661 23,033 3,997 15.5 17.1 21.1 85.8 10.2 24.0 23.3 21.2 17.1 6.9 6.1 5.3 2.2 2.1 1.9 0.6 0.9 1.5 9.9 10.1 11.7 26.9

Bharti Infratel REDUCE 344 270 (21.5) 650,445 10,378 1,889 11.2 13.0 15.7 38.9 16.3 20.7 30.8 26.5 22.0 12.8 11.3 9.8 3.7 3.6 3.6 3.3 2.8 3.5 11.8 13.8 16.3 6.2

IDEA BUY 152 192 26.1 547,897 8,742 3,595 8.4 9.5 9.4 41.3 13.5 (0.7) 18.2 16.0 16.1 8.3 6.9 6.0 2.4 2.1 1.9 0.5 0.6 0.7 15.2 13.9 12.3 11.0

Reliance Communications SELL 79 90 14.4 188,942 3,015 2,467 3.5 5.3 8.8 8.8 50.0 66.8 22.3 14.9 8.9 6.4 6.0 5.1 0.6 0.5 0.5 — — — 2.8 3.8 6.0 10.4

Tata Communications ADD 426 435 2.2 121,325 1,936 285 3.4 7.5 12.6 171.9 122.3 69.3 126.8 57.0 33.7 7.4 6.7 5.9 8.1 7.0 5.7 1.1 1.3 1.5 8.3 13.2 18.8 4.1

Telecom Neutral 2,952,269 47,103 63.4 15.8 22.1 24.1 20.8 17.0 7.6 6.7 5.9 2.1 2.0 1.8 1.1 1.2 1.6 8.7 9.4 10.7 58.6

Utilities

Adani Power SELL 45 36 (20.8) 130,529 2,083 2,872 (6.9) (4.2) (4.3) (577.9) 38.1 (0.6) (6.6) (10.7) (10.6) 10.7 9.3 9.7 2.8 3.7 5.7 — — — (34.9) (29.5) (42.2) 3.1

CESC ADD 692 695 0.4 91,743 1,464 133 28.1 55.5 70.4 (28.5) 97.2 27.0 24.6 12.5 9.8 11.1 7.9 7.1 1.1 1.0 0.9 1.1 1.1 1.1 4.6 8.4 9.9 5.1

JSW Energy SELL 100 73 (26.7) 163,431 2,607 1,640 9.5 9.2 8.0 37.8 (3.8) (12.4) 10.5 10.9 12.4 6.4 5.9 6.1 2.0 1.7 1.5 — — — 21.2 16.9 12.8 5.2

NHPC REDUCE 19 22 18.3 205,914 3,285 11,071 1.6 1.9 2.0 (1.1) 21.4 2.2 11.8 9.7 9.5 8.6 7.4 7.5 0.7 0.7 0.6 2.2 2.7 2.7 6.0 7.0 6.8 1.7

NTPC REDUCE 145 140 (3.4) 1,195,180 19,069 8,245 10.7 13.1 14.8 (16.7) 22.5 13.6 13.6 11.1 9.8 11.5 8.8 7.2 1.3 1.2 1.1 2.2 2.7 3.1 9.9 11.3 11.9 12.3

Power Grid BUY 138 160 15.6 723,790 11,548 5,232 9.8 12.4 15.6 14.0 26.4 25.8 14.1 11.1 8.8 10.3 9.2 7.8 1.9 1.7 1.5 2.2 2.7 3.4 14.3 16.3 18.4 9.7

Reliance Power SELL 62 62 0.8 172,515 2,752 2,805 3.7 4.1 6.2 (11.9) 11.5 50.5 16.6 14.9 9.9 21.2 10.8 8.1 0.8 0.8 0.7 — — — 5.2 5.5 7.7 8.0

Tata Power ADD 80 96 20.0 216,370 3,452 2,800 1.5 4.4 5.6 (28.3) 187.7 27.7 52.1 18.1 14.2 8.2 6.6 6.0 1.6 1.5 1.4 1.5 1.5 1.5 3.2 8.5 10.1 5.6

Utilities Cautious 2,899,473 46,260 (13.9) 33.3 18.0 16.9 12.7 10.8 10.5 8.5 7.5 1.4 1.3 1.2 1.8 2.1 2.5 8.0 9.9 10.8 50.6

Others

Carborundum Universal ADD 178 200 12.5 33,436 533 188 5.9 11.3 14.4 20.6 92.6 27.4 30.3 15.7 12.3 13.2 8.7 7.0 2.8 2.5 2.2 0.9 1.3 1.6 9.6 16.8 18.7 0.4

Coromandel International SELL 303 210 (30.7) 86,665 1,383 283 16.5 18.6 21.6 36.7 13.1 16.0 18.4 16.3 14.0 10.4 9.5 8.3 3.3 2.9 2.5 1.5 1.5 1.5 19.1 18.8 18.9 1.1

Godrej Industries ADD 284 345 21.5 95,362 1,521 331 14.6 18.0 20.2 48.6 22.7 12.2 19.4 15.8 14.1 17.2 12.3 8.6 3.0 2.6 2.2 0.6 0.6 0.6 16.5 17.4 16.8 2.0

Havells India ADD 274 310 13.2 170,985 2,728 624 9.0 11.2 13.2 12.8 24.5 17.7 30.4 24.4 20.7 18.7 14.9 12.6 8.8 7.4 6.3 1.2 1.6 1.9 31.2 33.1 32.8 13.6

Jaiprakash Associates RS 27 — — 65,190 1,040 2,432 1.1 4.5 4.5 120.0 306.6 (0.1) 24.1 5.9 5.9 12.2 9.4 9.0 0.6 0.5 0.5 0.0 0.0 0.0 2.5 9.0 8.5 17.7

Rallis India BUY 215 230 7.1 41,752 666 194 9.1 11.5 14.5 16.7 26.1 25.8 23.6 18.7 14.9 13.8 10.8 8.5 5.0 4.2 3.4 1.2 1.2 1.3 22.8 24.3 25.3 1.1

Tata Chemicals BUY 440 520 18.1 112,195 1,790 255 32.0 41.0 46.7 110.1 28.0 13.9 13.8 10.7 9.4 7.4 6.1 5.3 1.9 1.7 1.5 2.3 2.3 2.3 14.1 16.3 16.5 4.2

UPL ADD 333 370 11.2 142,640 2,276 429 27.7 32.9 37.5 13.7 19.1 13.7 12.0 10.1 8.9 7.2 6.3 5.4 2.3 2.0 1.7 1.4 1.5 1.7 20.7 20.9 20.2 9.4

Others 748,224 11,938 153.7 42.8 12.6 18.4 12.9 11.4 11.2 9.0 8.0 2.2 2.0 1.7 1.2 1.4 1.5 12.1 15.3 15.3 49.5

KIE universe 72,914,953 1,163,335 8.6 18.2 16.4 18.0 15.2 13.1 10.8 9.0 7.7 2.6 2.3 2.1 1.6 1.8 2.0 14.3 15.2 15.8

KIE universe (ex-energy) 64,139,050 1,023,319 13.6 19.5 17.0 19.4 16.2 13.9 11.8 9.8 8.4 2.9 2.6 2.3 1.5 1.6 1.9 15.1 16.1 16.6

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2015 means calendar year 2014, similarly for 2016 and 2017 for these particular companies.

(c) Exchange rate (Rs/US$)= 62.68

Dividend yield (%)Price/BV (X) RoE (%)


Disclo

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Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)

and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of September 30, 2014

Percentage of companies covered by Kotak Institutional

Equities, w ithin the specified category.

Percentage of companies w ithin each category for which

Kotak Institutional Equities and or its affiliates has provided

investment banking serv ices w ithin the previous 12 months.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the

next 12 months; Add = We expect this stock to deliver 5-

15% returns over the next 12 months; Reduce = We expect

this stock to deliver -5-+5% returns over the next 12 months;

Sell = We expect this stock to deliver less than -5% returns

over the next 12 months. Our target prices are also on a 12-

month horizon basis. These ratings are used illustratively to

comply w ith applicable regulations. As of 30/09/2014 Kotak

Institutional Equities Investment Research had investment

ratings on 154 equity securities.

22.1%

36.4%

22.1%19.5%

4.5% 4.5%1.9% 0.6%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

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Research Analyst has not served as an officer, director or employee of Subject Company

We or our associates may have received compensation from the subject company in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation or other benefits from the subject company or third party in connection with the research report.

Research Analyst or his/her relative’s may have financial interest in the subject company. Kotak Securities Limited or its associates may have financial interest in the subject company. Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: Kotak Securities Limited or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Subject Company may have been client during twelve months preceding the date of distribution of the research report.

A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the “three years” icon in the price chart).

CIN: U99999MH1994PLC134051

SEBI Registration No. and date: Member NSE (SEBI Registration No.: INB230808130 – 20-Feb-1996 / INF230808130 – 23-May-2000) Member BSE (SEBI Registration No.: INB010808153 – 25-Apr-2000 / INF011133230 – 08-Jun-2000) Compliance officer name, phone no. & email id: Mr. Sandeep Chordia, 66056025 & [email protected]

http://www.nseindia.com/

http://economictimes.indiatimes.com/markets/stocks/stock-quotes

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